Amortization
The schedule by which a fixed-payment loan is repaid, with each payment split into interest and principal based on the current balance.
Amortization is the schedule that repays a fixed-payment loan — a mortgage, an auto loan, a student loan on a standard plan — over a set term. The monthly payment is level. What changes is how each payment is split between interest and principal.
Interest each month is computed on the current balance. Early on, the balance is large, so interest claims most of the payment. As principal chips away at the balance, next month's interest is a little smaller, so a little more of the same payment lands on principal. The proportions shift, month by month, in the borrower's favor.
A concrete example. A $350,000 mortgage at 6.5% over 30 years has principal and interest of $2,212 a month. In month one, about $1,896 is interest and $316 is principal. By year 25, the same $2,212 payment is roughly $612 interest and $1,600 principal. Nothing changed about the loan except the balance it is charged against.
Plumb is financial education, not financial, investment, tax, or legal advice.