Amortization is a term linked with mortgage loans and is in general 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 important estimate and is paid over a specific period of time. The plan of amortization can seem complicated and understanding the process is important to becoming an informed borrower.
Loan Amortization Defined
The simplest way to justify the unlikeness in the middle of amortization and depreciation is understand the type of the financial events that they are linked with. Depreciation is a term used to define an asset (cash or non-cash) that loses value over time. Mortgage amortization is the periodic allowance of the important equilibrium of a home mortgage that is usually fixed in the terms of the loan.
For the purposes of a home mortgage, amortization is the allowance of the important 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 reputation or currency. At the beginning of the amortization program a greater estimate of the payment is applied to interest, while more money is applied to important 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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