In real estate financing, what does the term "amortization" refer to?

Amortization refers to the process of gradually paying off debt through a series of regular payments over a specified period of time. This involves breaking down the total amount owed into smaller, manageable installments, with each payment typically including both principal and interest. Throughout the life of the loan, the portion of each payment that goes towards the principal increases, while the portion that covers interest decreases. This systematic reduction of debt enables borrowers to see their loan balance diminish over time until it is fully paid off.

This concept is crucial in real estate financing, as it impacts how borrowers manage their loans and budget for mortgage payments. Understanding amortization helps individuals evaluate their financial commitments and the long-term implications of their borrowing decisions, such as total interest paid over the life of the mortgage.