What is amortization?

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What is Amortization?

Amortization is the repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment.

What most people notice when viewing an amortization schedule is that it is designed to pay off most of the interest early on in the loan while only a small percentage is going to the principal balance. As more and more of the principal is paid off, though, then the interest payments resultantly become less and less. The way amortization works means that only once you have spent a lot of time paying off a loan will you begin to build equity in your home (unless home values are appreciating).