What is Amortization?

In real estate, “amortization” means paying off debt, including principal and interest, in in installments over a specific period of time. In the case of a mortgage, it’s just another way of saying paying off your loan. All types of mortgages involve some kind of amortization.

For example, if you have a fixed rate mortgage and make regular monthly 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.

Amortization and Mortgages

When buying a home, most people 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 the mortgage off in an amortization schedule, payments are made towards both the interest owed and the principal balance. Usually, somewhere halfway through the term, loan payments contribute to equal amounts to interest and the principal.

Experts advise 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.