Amortization
The process of paying off a loan in equal periodic payments, each split between interest and principal.
What does amortization mean?
In an amortizing loan, early payments are mostly interest and later ones mostly principal, because interest is charged on the declining balance. By the final payment the balance reaches zero. An amortization schedule lists this split for every payment.
Put it to use
Amortization — frequently asked
Why does most of my early mortgage payment go to interest?
Interest is charged on the outstanding balance, which is largest at the start, so early payments are mostly interest and little principal. As the balance shrinks, the split flips and more of each payment attacks principal.
How do extra payments change amortization?
Extra money applied to principal shrinks the balance ahead of schedule, so less interest accrues every month afterward. Even small, consistent extra payments can shave years off the loan and save tens of thousands in total interest.