In the context of real estate loans, what does "amortization" mean?

Amortization refers to the systematic process of gradually paying off a loan through regular payments. Each payment typically consists of both principal and interest, where the principal portion reduces the outstanding loan balance, while the interest is calculated on the remaining balance. Over time, as more of the loan is paid down, a greater share of each payment goes towards the principal, leading to a decrease in the loan balance until it is completely paid off by the end of the amortization schedule.

This concept is crucial in real estate finance as it helps borrowers understand how their payments impact the total amount owed over the life of the loan. It aids in budgeting and planning, as borrowers can anticipate their payment obligations and how they will change over time as they pay down the loan. Amortization schedules are typically outlined in loan agreements, illustrating how payments are structured over the term of the loan.