Question 1

What is amortization?

Accepted Answer

Amortization is the process of paying off a loan through regular installments over time. Each payment is divided between interest charges and principal reduction. In the early payments of a long-term loan, the majority goes to interest. As the principal balance decreases, more of each payment reduces the balance. This is why the total interest paid on a 30-year mortgage is often more than the original loan amount.

Question 2

How do extra payments affect my loan?

Accepted Answer

Extra payments go directly toward reducing your principal balance, which has a compounding effect. With a lower principal, less interest accrues each month, so more of your regular payment goes toward principal as well. On a $250,000 mortgage at 6.5%, paying just $100 extra per month saves roughly $50,000 in interest and shortens the loan by nearly 6 years. The earlier you start making extra payments, the greater the savings.

Question 3

Why does most of my payment go to interest at first?

Accepted Answer

Interest is calculated on the remaining balance. When your balance is at its highest (the beginning of the loan), the interest charge is largest. On a $250,000 loan at 6.5%, the first monthly interest charge is about $1,354, while the total payment is about $1,580, so only $226 goes to principal. By the last year, the balance is small enough that nearly the entire payment reduces the principal. This is a fundamental feature of how amortization works.

Question 4

Is it better to make extra payments or refinance?

Accepted Answer

It depends on how much lower your new rate would be and the refinancing costs. Refinancing makes sense if you can reduce your rate by at least 0.5-1% and plan to stay in the home long enough to recoup closing costs (typically 2-5% of the loan). Extra payments make sense when refinancing is not worthwhile but you want to save on interest. You can also combine both strategies: refinance to a lower rate and continue making extra payments.

Question 5

Can I make biweekly payments instead of monthly?

Accepted Answer

Yes, and it is an effective strategy. Making half your monthly payment every two weeks results in 26 half-payments (or 13 full payments) per year instead of 12. That extra payment each year goes entirely toward principal. On a $250,000 30-year mortgage at 6.5%, biweekly payments save about $62,000 in interest and pay off the loan roughly 5 years early. Check with your lender to ensure they apply biweekly payments correctly.

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