Amortization

The payment of debt in regular and periodic installments of principal and interest, as opposed to interest-only payments. Amortization is a planned series of payments over the life of a loan that pay back the principal and interest on the debt in regular installments. Each amortized payment pays back a portion of the interest and a portion of the principal owed. Generally, in the first few years of a loan, the payment includes mostly interest with a little bit of principal. This is, in part, to make sure the lender gets paid more interest in the event of borrower default, or in the event of the borrower paying off the principal early, or in the event of the borrower refinancing. In reality, most borrowers either refinance or pay off their loan early. When this happens, the lender no longer receives interest payments, of course. If amortized payments started off as mostly principal, the lender would have collected very little interest by the time the borrower refinances. By front-loading the interest payments, the lender has made much more money by the time the borrower pays off the principal, since interest payments stop once the loan is entirely paid off.