Mortgage Dictionary

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Amortization

Loan amortization refers to the way that periodic payments are structured to pay off a loan.

Amortized payments are determined by dividing the amount owed (the principal) by the number of payment periods (usually months) remaining. Then, interest is added. Each payment reduces both the principal and the interest.

In most amortized home loans, the early loan payments are used mainly to pay off the interest. It may take more than half the life of the loan before the interest and principal portions of the loan payment are equal. The final loan payments are used mainly to pay off the principal.

A loan amortization schedule shows how each loan payment is used to pay off interest and principal. It may also show the unpaid principal at any point in time.

Tip To see how an amortization schedule is used to solve a real-world mortgage problem, read the discount points sample problem.

All of the mortgage calculators on this web site generate an amortization schedule showing all the standard outputs (principal, interest, unpaid balance). In addition, however, they show a very useful "extra" output - they show how total mortgage cost changes across payment periods.

See also:   Mortgage Amortization Calculator