Amortization is the process of paying off a debt, such as a mortgage, in regular installments over a period where each payment is divided into principal and interest portions.

Amortization: A Longer Definition

Amortization refers to gradually reducing a loan balance through regular payments over a specified term, such as 30 years or 15 years.

Mortgage payments are divided between principal and interest, determined at the time the loan agreement is signed. An amortization schedule shows how each payment reduces the loan and how much is applied to interest.

For example, if you take out a 30-year FHA mortgage to buy a home, your amortization schedule will list all 360 payments. It will show how much of each payment goes toward reducing your loan balance and how much covers interest.

Over time, a larger portion of each mortgage payment is applied to the principal, reducing the loan balance, while the amount applied to interest decreases.

Questions Home Buyers Ask About Amortization

How does amortization affect mortgage payments?

In the early years of a mortgage, most of each payment is applied to interest. As time goes on, more of each payment is applied to reducing the loan balance (principal).

Can amortization schedules vary?

Most mortgages have a fixed amortization schedule. However, some loans with adjustable rates can change how much is allocated to principal and interest over time.

What is negative amortization?

Negative amortization occurs when payments are not enough to cover the interest, causing the loan balance to grow. Mortgages with negative amortization, such as Option ARMs, were largely discontinued in 2014 under Consumer Financial Protection Bureau guidelines.