Math Walkthrough
Real Estate Amortization: Step-by-Step Walkthrough
Amortization is how mortgage payments are divided between principal and interest over the life of a loan. On the real estate exam, you typically don't have to compute a full amortization schedule — but you do need to compute interest for one period and figure out how much of a payment goes to principal.
The Two Formulas You Need
1) Monthly Interest = Loan Balance × (Annual Interest Rate ÷ 12). 2) Principal Paid = Monthly Payment − Monthly Interest.
These two formulas handle every amortization question on the exam. The exam never asks you to compute the monthly payment from scratch (that requires a financial calculator). Instead, the question gives you the payment and asks you to break it down.
Three Worked Examples
Question 1
Loan balance: $300,000. Annual interest rate: 6%. Monthly payment: $1,798.65. How much of the first payment goes to interest, and how much to principal?
Monthly interest: $300,000 × (6% ÷ 12) = $300,000 × 0.005 = $1,500. Principal: $1,798.65 − $1,500 = $298.65.
Question 2
Loan balance: $250,000. Annual rate: 4.8%. Monthly payment: $1,310.17. After the first payment, what's the new loan balance?
Monthly interest: $250,000 × (4.8% ÷ 12) = $250,000 × 0.004 = $1,000. Principal paid: $1,310.17 − $1,000 = $310.17. New balance: $250,000 − $310.17 = $249,689.83.
Question 3
After 1 year on a $400,000 loan at 5% annual interest, how much TOTAL interest has been paid in year 1? (Approximate — assume balance ~$400,000 throughout.)
Approximate annual interest = $400,000 × 5% = $20,000. (In reality, slightly less because balance decreases each month, but exam questions usually accept this approximation.)
Key Amortization Concepts
Early in the loan, most of the payment is interest. Late in the loan, most is principal.
Monthly interest = balance × (annual rate ÷ 12)
Principal portion grows each month as the balance decreases
A 30-year fully amortized loan ends with $0 balance after the final payment
Interest-only loans don't reduce principal until amortization begins
Practice Amortization Math
Drill these formulas with practice problems on the math page.
Other Math Walkthroughs
Amortization FAQ
Why does the principal portion grow each month?
Because the loan balance decreases each month, so less interest accrues, leaving more of the fixed payment to apply to principal.
What's a fully amortized loan?
A loan that pays off completely (to $0 balance) at the end of the term through scheduled payments.
What's negative amortization?
When the monthly payment is less than the interest accrued, so the loan balance grows. Some adjustable-rate loans had this feature historically.