Amortization
Amortization in real estate refers to the gradual repayment of a loan over time through regular payments that cover both the principal amount borrowed and the accrued interest. In essence, it’s the process of spreading out the cost of a loan over its term.
With each mortgage payment, a portion goes toward reducing the loan balance (the principal) and another portion goes toward paying the interest on the remaining balance. Initially, a larger portion of each payment goes toward interest, while over time, more of the payment goes toward reducing the principal. This is known as an amortization schedule.
Amortization schedules are typically structured so that the loan is fully paid off by the end of the loan term (e.g., 15, 20, or 30 years for a typical mortgage). They detail each payment’s allocation between principal and interest, allowing borrowers to see how their loan balance decreases over time.
Amortization plays a crucial role in real estate financing, as it determines the size and timing of mortgage payments, influences the total amount of interest paid over the life of the loan, and helps borrowers build equity in their property. Additionally, understanding the amortization process can empower buyers to make informed decisions about loan terms and repayment strategies.