Amortization
The process of paying off a loan through regular scheduled payments of principal and interest.
Definition
Amortization refers to the gradual payoff of a loan through a series of equal monthly payments. Each payment covers both interest owed on the outstanding balance and a portion of the principal. Early in a loan's life, most of each payment goes toward interest; over time, the principal portion increases.
For real estate investors, understanding amortization is critical for calculating true cash flow, equity build-up, and the true cost of debt. A 30-year amortizing mortgage on a rental property means you're building equity slowly — especially in the first decade when very little principal is repaid.
Investors often compare amortizing loans against interest-only loans. Interest-only loans produce higher monthly cash flow (since no principal is repaid) but build no equity through payments, and typically carry a balloon payment at maturity. The choice depends on your strategy, hold period, and exit plan.
Related Terms
Debt Service
The total cash required to cover loan payments — both principal and interest — over a given period.
PITI
Principal, Interest, Taxes, and Insurance — the four components of a monthly mortgage payment.
Balloon Payment
A large lump-sum payment due at the end of a loan term that pays off the remaining balance.
Leverage
Using borrowed capital (debt) to increase the potential return on an investment.
Loan-to-Value (LTV)
The ratio of a loan's balance to the property's appraised value, expressed as a percentage.