How amortization works
In an amortizing loan, each fixed monthly payment covers two components: interest on the outstanding balance and principal reduction. In the early years of a mortgage, most of each payment goes toward interest. Over time, as the balance decreases, the principal portion grows and the interest portion shrinks, even though the payment stays the same.
Payment = L × r / (1 − (1 + r)^−n)
Interest this month = balance × r
Principal this month = payment − interest
L = loan amount · r = annual rate ÷ 12 · n = number of monthly payments
Why extra payments matter
Making extra principal payments is one of the most effective ways to save money on a mortgage. Because each dollar of extra principal reduces your outstanding balance immediately, all future interest is calculated on a lower amount, creating a compounding benefit.
Worked example
A $300,000 loan at 7% for 30 years. Monthly payment: $1,995.91. Total interest over 30 years: $418,527, more than the original loan. By paying an extra $200 a month, you would pay off the loan in 275 payments, just under 23 years, and save about $116,600 in interest.
This illustrates why extra payments are so powerful: you are not just eliminating one month of interest, but all the compounding interest that would have accrued on that principal for years into the future.
Biweekly payments
Paying half your monthly payment every two weeks means 26 half-payments a year, the same as 13 full payments instead of 12. That one extra payment a year goes straight to principal and typically takes four to six years off a 30-year loan. Before signing up for a lender's biweekly program, check the fees: you can get the same result for free by adding one twelfth of a payment to each monthly payment.
Lump sums and recasting
A lump sum, from a bonus or an inheritance, shortens the loan but does not lower the required payment. If you would rather keep the original term and pay less each month, ask your lender about a recast: after a large principal payment, they recalculate the payment over the remaining term for a small fee. Most conventional loans allow it; FHA and VA loans usually do not.