Mortgage glossary
Amortization
Definition: Amortization is the process of paying off a loan through scheduled, equal payments over time, with each payment split between interest owed and reduction of the principal balance.
On a fully amortizing mortgage, early payments go mostly toward interest because the balance is at its highest. As the balance shrinks, more of each payment goes to principal. An amortization schedule shows this split for every payment over the life of the loan.
Understanding amortization helps borrowers compare a 15 year and a 30 year term, see how extra principal payments shorten a loan, and estimate how much equity they will build in the first several years. Interest only loans work differently: the balance does not drop during the interest only period.
Related terms
Reviewed by Kyle Richardson, NMLS #863464. General information, not advice for your specific situation. All glossary terms
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