People are often surprised, and sometimes suspicious, when they see how little of an early mortgage payment goes to the balance. On a $300,000 loan at 6.5 percent over 30 years, the monthly payment is $1,896.20. Of the very first payment, $1,625.00 is interest and only $271.20 touches the principal. That is about 14 percent of the payment doing what most borrowers think the whole payment is doing.
Nothing irregular is happening. Interest each month is charged on the balance outstanding at that moment. At the start the balance is the whole loan, so the interest portion is at its largest and the principal portion is whatever is left over from a fixed payment. As the balance falls, the interest charge falls with it and the principal portion grows to fill the gap. The payment stays flat; its composition rotates.
The rotation is slow at first and then accelerates. On that same loan, by month 60 the split has moved to $1,523.20 interest and $373.01 principal, and the remaining balance is $280,832.93. After five years of payments the balance has come down by roughly 6 percent of the original loan. That is the part that catches people out, and it is a direct consequence of the arithmetic rather than a fee structure.
Term length is what drives this, far more than the rate. A shorter term forces a larger principal share from the first payment, because the balance has to reach zero sooner. That is why a 15-year loan at a similar rate has a much higher payment but a dramatically lower total interest bill: less time for interest to accrue on a large balance.
The effect is milder on shorter asset loans, which is worth knowing if you are financing an RV, a motorcycle or land rather than a house. On a $45,000 loan at 5 percent over 6 years, total interest comes to $7,179.98 on $45,000 borrowed, or about 16 percent of the principal, against roughly 128 percent for the 30-year mortgage above. Same formula, very different totals, entirely because of how long the balance stays large.
Every figure here was recomputed from the standard fixed-rate amortization formula rather than quoted from a table, and the underlying scenarios reproduce to the cent. They are illustrative scenarios, not market rates, and not a quote or offer of credit.
A calculator that shows the full month-by-month split for your own term is at assetloancalculator.com.
If you would rather read the arithmetic than a description of it, the same level-payment formula and the period-by-period split are implemented in a small MIT-licensed JavaScript package with no dependencies, asset-loan-amortization. Its source and README are browsable in the CDN viewer at app.unpkg.com/asset-loan-amortization@1.0.0.