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# What is Amortization?

**Amortization** is process of paying off a debt (often from a loan or mortgage) over time through regular
payments. A portion of each payment is for interest while the remaining amount is applied towards the principal balance.
The percentage of interest versus principal in each payment is determined in an amortization schedule.

*Use our Amortization Schedule Calculator to view a payment plan for your loan or mortgage.*

Amortization terminology is also fairly standard. The most commonly used words include principal, interest rate, and term.

The **principal** is the amount of money borrowed in the loan. If you get a loan for $250,000, the principal of
the loan is $250,000. As you pay off the loan, the **principal balance** decreases. After 20 years, the principal
balance (often just referred to as the balance) may be $135,000 for example.

The **interest rate** (or annual interest rate) is used to determine how much money is paid back to the lender
in each payment period. In traditional loans, a calculation is performed with the remaining balance to determine how much
of the payment goes toward interest.

The **term** is the length of a loan or mortgage usually measured in years or months. It is
important to note that the term length does not always indicate the number of payments involved in the loan. A 15-year mortgage
often will have 180 monthly payments (15 years x 12 months = 180).