Amortization Plan

Amortization is a financial term referring to a method of creating a repayment plan in which a single lump-sum (the loan amount plus interest) is distributed over a number of installments according to an amortization schedule. Each of the installments or payments consists of elements of both the loan principal and the interest on the principal.

Amortization is a method chiefly employed for the repayment of loans such as a home mortgage. The payments are divided into equal amounts over the duration of the loan (or in this case the length of the mortgage) to create a simple repayment model and one that the homeowner can realistically expect to meet.

Early in the life of the loan the greater part of the installment or payment is applied toward meeting the interest on the loan whereas those payments that are made later are applied toward paying down the loan's principal sum.

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