Amortization
Also called: amortisation, amortization schedule
The schedule that splits each mortgage payment between interest and principal over the life of the loan.
On a fully amortizing loan, every payment is the same size but its composition changes. Early payments are mostly interest, because interest is charged on a large remaining balance. As the balance falls, more of each payment goes to principal.
That front-loading is why paying extra in the first years reduces total interest so much more than the same dollar paid near the end, and why a homeowner who sells after a few years has built less equity than the number of payments might suggest.
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Related terms
- PrincipalThe amount borrowed and still owed, separate from the interest charged on it.
- Interest rate (note rate)The percentage charged on your loan balance, the number your principal and interest payment is calculated from.
- RecastRe-amortizing an existing loan after a large principal payment, lowering the monthly payment while keeping the rate and term.
- PITIPrincipal, Interest, Taxes and Insurance, the four parts of a typical monthly mortgage payment.
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