Definition
Amortization is the process of paying off a loan through scheduled, equal monthly payments over time. Each payment covers both interest and principal, but the split shifts dramatically — early payments are mostly interest, while later payments are mostly principal.
Example
On a 30-year $280,000 mortgage at 6.5%, your first payment of roughly $1,770 includes about $1,517 in interest and only $253 in principal. By year 26, that same payment is approximately $1,350 in principal and $420 in interest.
How It's Calculated
Payment = P × [r(1+r)^n] ÷ [(1+r)^n − 1], where P = principal, r = monthly rate (annual interest rate ÷ 12), n = total number of payments
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