Amortization is the gradual repayment of a mortgage through scheduled principal and interest payments.
In a fully amortizing mortgage, the borrower makes regular payments calculated to retire the loan by the end of its term. Early payments usually contain a larger interest component, while later payments apply more money to principal. The balance therefore declines according to a predetermined amortization schedule.
Amortization is different from appreciation, which is an increase in an asset’s value, and depreciation, which generally describes a decline in value or an accounting allocation of cost. It is also different from capitalization, a valuation concept that converts expected income into a present value. These terms appear together in property finance, so confusing them is common.
Some loans are only partially amortizing or have a balloon payment at maturity. Interest-only loans do not reduce principal during the interest-only period. The exact payment pattern depends on the interest rate, loan amount, term, payment frequency, and whether the rate is fixed or variable.