Mortgage amortization refers to the process of gradually reducing the balance of a mortgage loan through regular payments over a specified period of time. These payments are calculated so that the loan is fully paid off (amortized) by the end of the mortgage term. An amortization schedule, which is often provided by the lender, details how much of each payment goes towards the principal (the original loan amount) versus the interest.
At the beginning of the amortization schedule, a larger portion of each payment is applied to interest, with a smaller portion going towards reducing the principal balance. As the loan balance decreases over time, the interest portion of each payment decreases, and the principal portion increases. This is because the interest payment is calculated on the remaining loan balance, which decreases as the principal is paid down.
This method ensures that the loan payments are predictable and consistent over the life of the loan, which can make budgeting easier for the borrower. The length of the amortization period typically depends on the type of loan and can vary widely, with common terms being 15, 20, or 30 years for a residential mortgage.
