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"Amortization" is a term used in real estate and finance to describe the process of paying off a loan, like a mortgage, over a set period of time through regular payments. These payments cover both the interest and the principal, or the original amount borrowed.
Imagine that you take out a mortgage to buy a house, and you agree to pay it off over 30 years. Each month, you make a payment that covers the interest you owe on the loan and a portion of the principal. Over time, your loan balance decreases until it's fully paid off. This process is called amortization.
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A few more key points about amortization that may come in handy as you study for your exams:
Amortization Schedule: This is a detailed table or chart that shows the breakdown of each payment into principal and interest over the life of the loan. It can be a helpful tool for understanding how much of your payment is going toward paying off the loan versus interest at any given time.
Types of Loans: Not all loans are amortizing loans. Some loans may have interest-only payments for a period of time, or a large "balloon" payment at the end where the remaining principal is due all at once. It's important to understand the terms of a loan before taking it on.
Prepayment: If you pay more than your scheduled payment in a given month, the extra usually goes directly toward reducing the principal. This can result in paying off the loan sooner and paying less in total interest over the life of the loan.
Tax Implications: In many jurisdictions, the interest portion of a mortgage payment can be tax-deductible. This is an important factor to consider when planning your finances.
Loan Term: The length of time over which the loan is amortized is known as the loan term. Common terms are 15 or 30 years for a mortgage, but other lengths are possible. A shorter term will result in higher monthly payments but less total interest paid over the life of the loan.
Understanding the concept of amortization is crucial for real estate professionals as it plays a major role in mortgages and other types of real estate financing.
"Wit & Whimsy with the Dumb Ox: Unlocking Knowledge with Rhyme:"
In the world of loans and homes, a term you'll want to know,
Amortization is the name, for paying what you owe.
With time and payments set just right, a mortgage you'll repay,
Both interest and principal, in a methodical way.
A house you buy with borrowed funds, a mortgage to be clear,
Amortization takes its course, for thirty years, I hear.
Each month a payment made with care, the balance does decrease,
Until one day the debt is gone, and you can live in peace.
So when you study real estate, and terms you'll need to learn,
Remember Amortization, where debts find their return!