At the beginning of an amortization schedule, which is higher: principal or interest?

• A. Fees
• B. Interest
• C. Taxes
• D. Principal

Answer: (B)

At the start of an amortizing loan, the interest portion of your payment is larger than the principal portion. That’s because interest is calculated on the outstanding loan balance, which is highest right after you borrow. Since you owe the full amount at the beginning, the interest that accrues in the first period is also at its peak. Your fixed monthly payment must cover that interest first, so only the remainder goes toward reducing the principal. As you continue paying, the balance shrinks, so the interest owed each period drops while more of the fixed payment goes to paying down the principal. Taxes or fees aren’t part of the amortization of the loan balance, though they may appear in total monthly costs separately.