Amortization

The schedule of payments that gradually pays off a loan's principal and interest.

Amortization spreads a loan into equal payments over its term, where each payment covers that period's interest plus a bit of principal. Because interest is charged on the remaining balance, the interest/principal split shifts over time — early payments are mostly interest, later payments are mostly principal, even though the total payment stays the same.

Worked Example

On a 30-year, $300,000 mortgage at 6.5%, the first payment of about $1,896 is roughly $1,625 interest and $271 principal. By year 25, a similarly sized payment is mostly principal — the balance has shrunk enough that there's far less interest left to charge.

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