Amortization

The process of paying off a loan through regular installments, the amount of which is determined by the loan amount, length, and interest rate.

More Details

Amortization is the process of gradually reducing a debt through periodic payments of principal and interest. As the borrower makes each payment, a portion of the payment is applied to the outstanding principal balance of the loan, while the remaining portion is applied to the interest. Over time, the amount applied to the principal increases and the amount applied to the interest decreases, until the loan is fully paid off and the principal balance is zero.

Example

If you take out a $300,000 mortgage with a 4% interest rate and a 30-year term, your monthly payment would be $1,432.25. Over time the portion applied to the principal would increase, until the loan was fully paid off after 30 years.

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