Amortization
The process of paying off a loan through fixed regular payments, where each payment covers interest first and the rest reduces the balance.
What Amortization means
Amortization is how a loan with a fixed payment gets paid down over time. Every payment is split between interest owed for that period and principal that reduces what you still owe.
Because interest is charged on the outstanding balance, early payments are mostly interest and barely dent the principal. As the balance shrinks, the interest portion falls and the principal portion grows — so the same payment does progressively more work.
An amortization schedule is the table showing that split for every payment across the life of the loan. It is the clearest way to see the true cost of borrowing, and why extra payments made early save far more interest than the same payment made late.
Example
In practice: On a $300,000 30-year mortgage at 6.5%, the first monthly payment of about $1,896 puts roughly $1,625 toward interest and only $271 toward principal.
Related terms
Principal
The original sum borrowed or invested, separate from any interest charged or earned on it.
Interest Rate
The percentage charged for borrowing money or paid for depositing it, quoted as an annual figure.
APR (Annual Percentage Rate)
The yearly cost of borrowing, expressed as a percentage that includes the interest rate plus most lender fees.
Escrow
Money held by a neutral third party — either during a home purchase, or by your lender to pay property taxes and insurance.
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