Most home loans are fully amortizing. This means that the borrower makes monthly payments of both interest and principal, typically, allowing the homeowner to build home equity over time. Despite that, some loans are negatively amortizing, meaning that the borrower is making payments that are actually less than the interest owed on the loan. This means that the principal owed on the loan increases over time -- which can often leave borrowers in a sticky position when it comes time to pay up.

What is the Meaning of Amortization?

Amortization refers to a type of payment schedule that some home loans utilize. The payment schedule is made up of equal payment amounts that are stretched over a designated amount of time (the loan term). For the purpose of an amortization schedule, each payment is divided into two portions. There is a portion that is made up of interest (the cost of the loan), and a portion that is made up of principal (the value of the borrowed sum).

Amortized Loans with Regard to Home Loans

An amortized loan is a debt that’s paid off over time in equal installments. Each payment pays off the interest and the principal.

In the beginning, the installments prioritize paying off the interest and a portion of the principal. Over time, the interest will become a small part of the installment, as the principal will have become a larger component.

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