What is amortization and how does it work?

Amortization is the process of paying off a loan through scheduled, equal monthly payments over a set period. Each payment covers both interest and principal, but the proportion shifts over time. Early in the loan term, most of your payment goes toward interest. As the balance decreases, a larger portion goes toward principal. A 30-year mortgage is fully amortized over 360 months. You can view this breakdown using an amortization schedule, which shows exactly how each payment is applied throughout the life of the loan.