What does the term "amortization" mean?

Amortization refers to the process of paying off a loan over a designated period through a series of regular payments. Each payment typically consists of both principal and interest, gradually reducing the outstanding balance of the loan until it is completely paid off at the end of the term. This method helps borrowers to manage their loan repayment in a structured manner, allowing them to see how much of their monthly payment goes towards paying off the principal versus the interest over time.

Understanding amortization is crucial for both borrowers and mortgage professionals, as it influences the overall cost of a loan, the monthly payment amounts, and the long-term financial planning for homeowners. It contrasts with other concepts, such as the initial payment made during closing or penalties for early repayment, which do not reflect the ongoing nature of how loans are typically repaid.