Real Estate
What is Amortization?
Definition
Amortization is the schedule of paying off a loan through fixed periodic payments allocated between principal and interest. Early payments are interest-heavy; later payments are principal-heavy. A 30-year mortgage may take 18 years before principal exceeds interest each month.
Real-World Example
On a $300,000 loan at 7%, the first payment applies $250 to principal and $1,750 to interest. Two decades later the split flips to $1,530 principal and $470 interest.
Why It Matters
Understanding amortization exposes why paying an extra $200 a month in the early years shortens a 30-year mortgage by 6 to 8 years and saves tens of thousands.
Frequently Asked Questions
Do all loans amortize?
No. Interest-only loans and balloon loans do not fully amortize and leave a large remaining balance at term.