Carolyn Carpenter-Hawkins | Mortgage Amortization

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Mortgage amortization refers to the process of gradually paying off a loan over time through a series of regular payments. These payments typically cover both the principal amount borrowed and the interest charged by the lender. The word “amortization” itself refers to the gradual reduction of a debt through systematic payments.

In a typical loan, the borrower agrees to make regular, fixed payments, usually on a monthly basis, over the loan’s predetermined term. Each payment consists of two components: principal and interest.

1. **Principal:** This is the original amount of money borrowed to purchase the home. With each property loan payment, a portion of the payment goes towards reducing the outstanding principal.

2. **Interest:** Lenders charge interest as the cost of borrowing money. The interest is calculated based on the remaining outstanding principal. In the early years of a loan, a larger portion of the monthly payment goes towards paying interest.

As the borrower continues to make payments, the balance between principal and interest gradually shifts. Over time, more of the monthly payment goes towards reducing the principal, and less is allocated to interest. This process continues until the loan is fully paid off, and the borrower has satisfied the terms of the mortgage.

Mortgage amortization schedules are often provided to borrowers, outlining each payment’s allocation between principal and interest over the life of the loan. Understanding amortization is crucial for borrowers, as it allows them to see how their payments contribute to building home equity and ultimately owning their property outright.

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