Amortization is a term connected with mortgage loans and is generally used in relation to loan repayments. Technically defined, amortization is an accounting method in which expenses are accounted for over the beneficial life of the asset rather than at the time they are incurred. Amortization is similar to depreciation in that the value of the liability (or asset) is reduced over time.
Simplified in terms of a mortgage, amortization is a payment each month that combines both interest and the essential whole and is paid over a specific period of time. The concept of amortization can seem involved and insight the process is essential to becoming an informed borrower.
Loan Amortization Defined
The simplest way to construe the discrepancy between amortization and depreciation is understand the type of the financial events that they are connected with. Depreciation is a term used to define an asset (cash or non-cash) that loses value over time. Mortgage amortization is the periodic reduction of the essential equilibrium of a home mortgage that is commonly fixed in the terms of the loan.
For the purposes of a home mortgage, amortization is the reduction of the essential or capital on a loan over a specified time and at a specified interest rate. Interest is the fee paid by the borrower to reimburse the lender for the use of prestige or currency. At the beginning of the amortization schedule a greater whole of the payment is applied to interest, while more money is applied to essential at the end. In other words, a borrower will start out paying mostly interest and in the end the majority of the monthly payment goes toward cutting down the actual loan amount.
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