The process of gradually paying off a loan through regular scheduled payments that cover both principal and interest.
Full Definition
Amortization describes how a loan is paid off over time through equal monthly payments (for fixed-rate mortgages). Despite equal payments, the split between principal and interest shifts over the loan's life: early payments are mostly interest with a small principal reduction; later payments flip to mostly principal. This happens because interest is calculated on the remaining balance each month — as the balance falls, less interest accrues, leaving more of each payment to pay down principal. A 30-year mortgage amortization table shows you'd pay roughly 96% of the original loan in interest and principal payments over the life of the loan. Extra principal payments early in the amortization period have an outsized impact on total interest paid.
Related Terms
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