Amortization

Amortization refers to the gradual reduction of a loan balance over time through regular payments. In the context of mortgages, amortization involves paying off both the principal amount borrowed and the accrued interest over the loan term. Each mortgage payment is typically divided into two components: principal and interest. During the early years of a mortgage, a larger portion of each payment goes toward paying interest, while a smaller portion is applied to the principal. As the loan progresses, the portion allocated to interest decreases, and the amount applied to the principal increases. This gradual reduction of the loan balance is known as amortization. By the end of the loan term, the entire principal amount, along with the accrued interest, is fully repaid. Amortization schedules provide borrowers with a detailed breakdown of each payment, showing how much goes toward principal and interest, helping them track their progress in paying off the loan.