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Amortization explained

What is Amortization
What is Amortization? -Mortgage Rates Today

Amortization is a strategy used in accounting to reduce the book value of a loan or intangible asset over a predetermined period of time. When it comes to a loan, amortization refers to the process of spreading out payments over time. Amortization is similar to depreciation when applied to an asset.

Amortization process

A portion of interest and a piece of principle will be paid to the lender with each payment. Mortgage loans are usually repayable over time. An amortizing loan is calculated like an annuity using time value of money formulas and can be done with the help of an amortization calculator.

A bullet loan, on the other hand, is one in which a big percentage of the loan is paid off at the end of the loan’s term rather than being paid down gradually over time.

The amount of amortization expense claimed since the asset’s acquisition is represented by a cumulative amortization loan.

Amortization definition

An Amortizing loan is a loan where the principal of the loan is paid down over the life of the loan (that is, amortized) according to an amortization schedule, typically through equal payments.
An amortizing bond, on the other hand, repays a portion of the principle (face value) in addition to the coupon payments. A sinking fund, on the other hand, repurchases some bonds to amortize the total debt outstanding.

Amortization calculators for monthly payments

It’s pretty simple to create a loan amortization schedule with our Mortgage Payment Calculator Virginia. If you want to manually do the calculations beginning with the first month, multiply the entire loan amount by the loan’s interest rate. Divide the result by 12 to find your monthly interest on a loan with monthly instalments.

Importance of amortization

In the context of loan repayment, amortization schedules show how much of a loan payment is interest and how much is principal. This can be beneficial for tax considerations, such as deducting interest payments.


For more information on  Amortization, contact the mortgage experts at Mortgage Rates Today!