What happens to the interest portion of payments in an amortized loan over time?

In an amortized loan, the structure of payments is designed so that each payment consists of both principal and interest. As payments are made over time, the outstanding balance of the loan (the principal) decreases. The interest charged for each payment is calculated based on the remaining principal amount. Therefore, as the principal decreases, the interest portion of each payment also gradually decreases.

This phenomenon occurs because the interest for the next period is computed on a smaller principal amount compared to the previous periods. Consequently, while the total monthly payment remains constant, the ratio of principal and interest within that payment shifts, resulting in a decreasing interest portion over the life of the loan.

Understanding this concept is crucial for borrowers, as it influences overall loan costs and the speed at which equity is built in the property financed by the loan.