What is the Meaning of Amortization?
Amortization in Home Loans
Amortization refers to a type of payment schedule that some home loans utilize. The payment schedule is made up of equal payment amounts that are stretched over a designated amount of time (the loan term). For the purpose of an amortization schedule, each payment is divided into two portions. There is a portion that is made up of interest (the cost of the loan), and a portion that is made up of principal (the value of the borrowed sum).
How Amortization Schedules Work
Typically, in most loans with the amortizing payment schedule, the proportion of interest to principal favors interest in the beginning of the loan term, and gradually shifts to favor principal over time. While the total monthly amount being paid never changes, the portions of the payment dedicated to interest decreases while the portion dedicated toward the principal increases.
Many loan calculators like the ones found on home.loans come complete with a table that shows the amortization payment schedule.