Amortization
Definition
The process of paying off a loan over time with regular payments. Each payment covers part of the principal (original amount borrowed) and part of the interest. As you pay down principal, interest decreases because there's less to charge interest on.
Why It Matters
Understanding amortization helps you see how much of your mortgage payment goes to principal vs. interest. Early in the loan, most goes to interest. This is why paying extra principal can save you years of payments and tens of thousands in interest.
Example
A $300,000 mortgage at 6% for 30 years has a ~$1,799 monthly payment. In month 1: $1,500 is interest, $299 is principal. In month 360: nearly all $1,799 is principal. Paying an extra $200/month cuts years off the loan.