Amortization
National Real Estate Exam glossary · Financing
Definition
The gradual repayment of a loan through periodic payments that cover both interest and principal, structured so the balance reaches zero at maturity. Early payments are mostly interest; later payments are mostly principal, because interest each period is charged only on the declining outstanding balance.
Amortization in plain English
Amortization is a repayment schedule built so that steady, equal loan payments slowly erase the debt to exactly zero by the end date, with each payment covering both the interest (the rental fee for borrowing) and a chunk of the principal (the actual amount borrowed). Here's the clever twist that surprises people: your early payments are almost all interest and barely dent what you owe, while your later payments are almost all principal. That happens because interest is charged only on the balance still outstanding — when the balance is huge at the start, the interest slice is big; as the balance shrinks, less goes to interest and more knocks down the principal. It's like slowly draining a bathtub: at first most of your effort fights the pressure of a full tub, but as the water drops, your bailing goes further.
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Practice Amortization
A borrower has a mortgage where the monthly payments are… This scenario is known as:
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