What is amortization?
The process of paying off a loan through specifically structured periodic payments is known as amortization. Amortized loans are different from other loans due to the way the amount and the structure of each payment is determined. Mortgage payments are a common form of amortized loans, and interestingly enough, both the term mortgage and the term amortization find their meaning in the same root word “mort.” This term means to deaden or kill, as in to “kill off” or eliminate the loan a bit at a time, via regular payments. Regarding home loans, payments are usually the same amount each month with a fixed interest rate. In some cases, the last payment may be a bit more or a bit less than payments made throughout the life of the loan. To learn if you can afford the the payments on the home of your dreams, visit a real estate company, investment firm, or mortgage lender’s website. Several offer simple to use amortization calculators. Amortized payments are calculated by dividing the princip
If you buy a home, become a banker, or deal in the financial industry, amortization will not be a large part of your daily vocabulary. But, if you’re an accountant, and choose one of the careers listed above, you’re going to need to understand this term. You really are going to need to know how to use it to your advantage, also. Amortization is defined as the way to reduce debt by installments. In other words, we reduce the amount of our obligations by making monthly payments against the debt. Mortgage payments are an amortization of our loan made to purchase our home. So, if you purchase a home, you will need to understand amortization, as well. When the debt you incur is much larger than can be paid within a few weeks or months, lending institutions “amortize” the loan; that is, they calculate equal monthly installments that are designed to provide you with payments that take care of the debt plus the interest charged for the use of the lending institutions money while you repay the
Amortization means paying down your principal. You repay your loan in monthly installments. If you have a fixed mortgage (that is, an interest rate that remains fixed for the entire term of the loan), your payments will always be the same amount. Part of the payment goes toward the payment of the interest, and part toward the repayment of the money you’ve borrowed (the principal). The balance of the principal (what you still owe at any given time) is reduced with each payment. As a result, your monthly payment will pay the principal in increasing amounts over time. With a fixed-interest rate, the amount of interest you owe will decrease as your principal balance decreases. You can create an amortization schedule for fixed loans when they are originated. This schedule will show how much of each payment will go toward interest and how much will go toward principal over the life of the loan. As your principal decreases, your equity in the mortgaged property increases. Equity is a very imp
