The word “amortization” may be a little difficult to say, but it’s really not that hard to understand.
What does amortization mean?
You may hear this term used by a mortgage professional when they say, “Your loan is fully amortizing.” Amortization is simply the process of paying off debt with regular payments made over time.
The monthly payments cover both the principal and interest on the account, with the interest charges becoming smaller and smaller over the payment schedule.
When looking at an amortization schedule, the payments are structured just like the definition states. The monthly payments on a schedule show that the majority of the payment covers the interest on the loan at first, and then the interest payments become smaller and smaller, and the principal portion of the payments becomes larger and larger with the same monthly payment each month of the loan.
To further define, interest paid each month is calculated based upon your principal or your loan balance each month. Each payment you make goes towards that month’s interest, and the remaining funds reduce your loan balance. In most mortgages, the amount paid each month in interest progressively decreases, while simultaneously the amount owed on the principal progressively increases.
We hope that helped to clarify what amortization means. For more information, contact a member of our Traditions Mortgage team today!