Educational information, not individual financial advice.
Key Takeaways
Amortization is the process by which a loan is paid off through a series of fixed, equal payments. The word comes from the Latin mortis — "to death" — because the loan's balance is killed off over time.
Each monthly payment is split into two parts:
After the payment, the balance drops by the principal portion. Next month, the new, lower balance earns less interest, so more of the fixed payment goes to principal. Over time this snowballs.
Worked example — $200,000 mortgage at 6% for 30 years:
The interest dropped by $1 from month 1 to month 2 because the balance dropped $199.10 last month. That $1 doesn't sound like much, but each subsequent month it accelerates.
Showing a generic example — not your plan.
Early years are mostly interest — the principal bar barely moves. Over time, the crossover accelerates as each payment eats more of the principal.
The month where interest and principal are equal is called the crossover point. For a 6% 30-year mortgage, it's around year 18 — meaning for the first 18 years, more of each payment goes to interest than principal.
This is a genuine surprise for most new homeowners. After five years of a 30-year mortgage, you've paid off maybe 7% of the principal, despite making 60 payments totaling 17% of the original loan.
Extra principal payments reduce total interest by far more than the extra amount paid. Example on that same $200k / 6% / 30-year mortgage:
The mechanism is compounding in reverse. Every dollar of extra principal today removes the interest that dollar would have generated over the remaining term. Early in the loan, that removal is large.
A full amortization table shows every payment, broken into interest and principal, with running balance. Useful for:
Most online amortization calculators generate these tables. Horizons generates an amortization view for each liability.
Some loans don't amortize normally. A "negative amortization" or "payment option" loan lets you pay less than the interest charge. The unpaid interest is added to the balance, which grows over time.
These were common before the 2008 crisis and are now rare, with good reason. They create balloon problems that few borrowers can handle.
Some loans (rare in the U.S. mortgage market but common for some auto, personal, and commercial loans) charge a penalty if you pay off early. Check the loan documents before planning extra payments or a refinance. Typical structures:
If the penalty exists, calculate whether prepayment still comes out ahead.
Each liability in Horizons amortizes correctly each month. The engine tracks the split between interest and principal, applies extra payments from your surplus (if you've configured that in Budget Rules), and removes the liability automatically when the balance hits zero. The linked payment expense also ends, freeing up the cash flow for savings or discretionary spending.
You're 5 years into a 30-year mortgage. Roughly what percentage of the original principal have you paid down?
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Known limitations
Sources
Educational information distilled from the Horizons engine methodology — not individual financial advice.
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