Amortization

Amortization is the process of paying a loan off through regular, level payments over a set term. Each payment covers the interest due for that period first, and whatever is left reduces the principal balance.

Because interest is charged on the remaining balance, the early years of a long mortgage are interest-heavy and build equity slowly; as the balance falls, more of each identical payment goes to principal. An amortization schedule lays this out payment by payment.

Understanding the curve is what makes extra principal payments and refinance timing make sense: paying down principal early removes interest that would otherwise compound across the full remaining term.