is a term that is used in financial contexts and applications, and is usually
associated with loans. Amortization simply means paying off an existing loan
through the implementation of a structured payment plan. An amortizing loan is
different from other loans due to the structure in which payments and the
overall amount are calculated and determined.
The most common of amortizing loans are mortgages.
In fact, the term “amortize” is actually included in the formulation
of the word “mortgage,” which appropriately describes the type of
loans they are.
In the case
of mortgages and home loans, all payments are usually made on a monthly basis
accompanied with a fixed interest rate. However, because there are various
types of mortgages, how they amortize may differ. For example, some amortizing
home loans will require a larger payment as the last payment.
The amortization definition for a type of loan
will usually depend on how the amortized payments are calculated. This involves
dividing the amount left over after the down payment is made by the total
amount of time that is permitted to repay the loan. Typically, an amortizing
loan such as a mortgage will usually be given 15, 20, or 30 years in terms of
payment options. Furthermore, the interest of the loan is also factored in,
which will also affect the monthly amount. However, the interest in an
amortizing loan will be paid off first, then a portion of the principal amount.