Amortization is a term associated with mortgage loans and is generally used in relation to loan repayments. Technically defined, amortization is an accounting recipe in which expenses are accounted for over the useful 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 cost each month that combines both interest and the important estimate and is paid over a exact duration of time. The view of amortization can seem complex and insight the process is important to becoming an informed borrower.
Loan Amortization Defined
The simplest way to account for the disagreement between amortization and depreciation is understand the type of the financial events that they are associated 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 commonly 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 credit or currency. At the starting of the amortization schedule a greater estimate of the cost 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 cost goes toward cutting down the actual loan amount.
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