What Is Amortization?

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

Amortization: A longer definition

Amortization refers to gradually reducing a loan balance through regular payments over a loan’s term of 30 years, 15 years, or other.

A home buyer’s mortgage payments and how each payment is divided between principal and interest is determined on the date of signing. Amortization schedules outline each payment’s allocation between principal and interest.

For example, suppose you use a 30-year FHA mortgage to buy a home. Your amortization schedule will list all 360 payments you make to your lender, showing how many dollars of each payment get allocated to reducing your loan amount and how many dollars get allocated to interest payments.

Each month, a larger percentage of each mortgage payment goes towards the principal, reducing the loan balance, while the interest portion of each payment decreases.

Questions Home Buyers Ask About Amortization

How does amortization affect mortgage payments?

In the early years of a mortgage, most of each payment goes toward interest, but over time, a greater proportion is applied to the principal, reducing the loan balance.

Can amortization schedules vary?

While most mortgages have a fixed amortization schedule, some loans may have adjustable rates, changing the amount allocated to interest and principal over time.

What is negative amortization?

Negative amortization occurs when the monthly payments are too small to cover the interest due on the loan, which increases the loan balance. Negative amortization mortgages, such as the Option ARM, were discontinued in 2014 as part of the Consumer Financial Protection Bureau mortgage guidance.