An amortized note is repaid in equal, regular payments, each of which covers that period’s interest and also repays some of the amount borrowed. If every payment is made on schedule, the balance reaches zero with the final one.
How each payment is split
The payment stays the same from the first month to the last, and what changes is how it is divided. Interest is charged on whatever is still owed. Early on the balance is high, so the larger share of the payment goes to interest and a smaller share reduces the principal, which is the amount borrowed. As the balance falls, the interest share shrinks and the principal share grows, until near the end almost the whole payment is principal.
An example with round numbers shows the mechanism. On a $100,000 balance at 6%, a year’s interest is $6,000, so one month’s is $500. If the payment is $800, the first one sends $500 to interest and $300 to principal. The balance is now $99,700, the next month’s interest is $498.50, and $301.50 goes to principal. That small shift repeats every month until the note is paid off.
Illustrative example. Your own note’s schedule will show the exact split for each payment.
The amortization schedule
The table that lists every payment, with its interest portion, its principal portion and the balance afterward, is called an amortization schedule. If you hold a note, keep one with it. It tells you what is owed on any date, and a buyer will want it matched against the payments you have received.
The amount still owed at any point is the unpaid principal balance. Pricing starts from that figure, whatever the original loan amount was. It is one of the four facts we ask for when you send us an amortized note to price, along with the payment, the rate and the start date.
Fully amortized and partly amortized
A fully amortized note pays itself off through its regular payments, with nothing extra due at the end. A partly amortized note uses a payment calculated over a long period but comes due sooner, leaving a lump sum owed on the final date, which makes it a balloon note. An interest-only note goes further, with payments that repay no principal at all.
How a buyer sees a fully amortized note
Of the types of note a buyer is offered, this one has the fewest moving parts. Each payment lowers the balance, so the property secures a smaller debt as time passes. The payer’s equity, meaning the property’s value minus what they owe, grows without anyone doing anything. The buyer has no single event to depend on, such as a refinance or a sale of the property, and only needs the payments to keep arriving. And because the amounts and dates are fixed, two buyers looking at the same note are working from the same facts.
A fully amortized note still sells for less than its balance. The buyer is paying now for money that arrives later, and the longer the note has left to run, the more the distant payments are discounted. What amortization takes away is one layer of uncertainty.
Splitting an amortized note
Even, predictable payments make this the simplest kind of note to divide. In a partial sale a buyer purchases the next block of payments, and the note returns to you afterward with the rest of the schedule intact. The schedule also tells you in advance what will be owed to you on the day it comes back, so you can see what you are keeping before you agree to anything.
Reconcile the balance before you ask for quotes
Pull out the schedule and compare its balance for this month with the balance you believe is owed. A gap between the two comes from somewhere: a missed payment, extra principal paid, or late fees mixed in with the balance. A buyer will find it during their review, and tracing it yourself first avoids a price change later. If you cannot find the cause, ask whoever collects the payments for a payment history and work forward from the last month the two agreed.
Related questions
Why does so little of my early payment go to principal?
Interest is charged on the balance still owed, and that balance is highest at the start. As it falls, less interest is charged each month and more of the same payment goes to principal.
What happens if the payer pays extra?
How extra money is applied depends on the note's terms. Where it goes to principal, it lowers the balance and shortens the note, and the original schedule no longer matches. Keep a record of every extra payment, because a buyer will want the balance to reconcile.
Is a fully amortized note worth more than one with a balloon?
Not automatically. It is easier to price and carries less uncertainty, which buyers like. But a balloon note with strong equity and a near due date can price well too. The payer and the property still matter most.