Amortization: Meaning & Example

Amortization is an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period. In the context of a loan (like a mortgage or auto loan), amortization refers to the process of paying off the debt through regular principal and interest payments over time. In the early years of the loan, a larger portion of your payment goes toward interest, while in the later years, the majority of the payment pays down the principal.

If you take out a $300,000, 30-year fixed-rate mortgage at 5% interest, your monthly payment will be exactly $1,610.46. In month 1, $1,250 goes to interest and only $360.46 goes to principal. By month 360, almost the entire $1,610.46 goes directly to the principal.