Amortization
Quick Answer
Amortization is the process of spreading out a loan into a series of fixed payments over time, where each payment covers both principal and interest.
Definition
Amortization is the process of spreading out a loan into a series of fixed payments over time, where each payment covers both principal and interest.
Explanation
Amortization determines how your monthly payments are structured over the life of a loan. With each payment, a portion goes toward interest and the remainder reduces the principal balance. In the early years, more goes toward interest; over time, more goes toward principal.
Most mortgage, auto, and personal loans use amortization schedules that show every payment, interest and principal portions, and remaining balance after each payment.
Example
A $300,000 30-year mortgage at 6% interest has a monthly payment of about $1,799. In the first month, $1,500 goes to interest and only $299 to principal.
Frequently Asked Questions
What is Amortization?
Amortization is the process of spreading out a loan into a series of fixed payments over time, where each payment covers both principal and interest.
How does Amortization work?
Amortization determines how your monthly payments are structured over the life of a loan. With each payment, a portion goes toward interest and the remainder reduces the principal balance. In the early years, more goes toward interest; over time, more goes toward principal.Most mortgage, auto, and personal loans use amortization schedules that show every payment, interest and principal portions, and remaining balance after each payment.
Can you give an example of Amortization?
A $300,000 30-year mortgage at 6% interest has a monthly payment of about $1,799. In the first month, $1,500 goes to interest and only $299 to principal.
Free Excel Templates
Also try our free Mortgage Amortization Schedule template
Create a detailed mortgage amortization schedule. See exactly how much principal and interest you pay each month over the loan term.
Download Mortgage Amortization Schedule