In real estate, the word "amortization" means paying off debt in a specific amount over a period of time - the life of the loan.
If you have a fixed rate mortgage where you make installment payments to reduce the balance of your loan amount, you are taking part in amortization. Typically with an amortization loan, you will need to pay the same amount every month on the same due date and all amounts (except the final payment) will be in equal amounts to each other.
When buying a home most consumers will need to borrow money to afford the purchase. The amount you will need to borrow will be the total agreed upon sales price and closing costs (if you opt to roll them over into the loan) minus the down payment amount you put on the property. The remaining balance is then called the principal. The principal divided by the total number of payments allocated for the loan and then interest (based on your credit history and length of loan) is added into the total equation.
By paying it off in an amortization schedule, payments are made both towards paying down the interest and the principal balance. Usually, somewhere halfway during the loan payments the amount going towards the interest and principal equally balances out.
Experts advice that if you cannot qualify for a fixed rate mortgage set up on an amortization schedule, you probably cannot truly afford the home in question. A fixed rate mortgage with amortization payments is the most structured and predictable way to pay off your home's value. The best rates and offers are generally reserved for prime rate borrowers.
