Amortization

Amortization is a simple process in which once you take a mortgage, you pay it off in installments on a monthly basis. Depending on the time period you get to pay off the mortgage, you can either use a fixed interest mortgage or an adjusted rate mortgage.

If you take a fixed interest mortgage, the interest rate will remain the same throughout the period. However, when you take an adjusted rate mortgage, the interest rate will vary depending upon the various factors such as economic inflation, the value of the asset you’re mortgaging, fluctuating, etc.

In both cases, the monthly payment is divided into the principal amount and the interest amount. Thus, you pay the principal + interest every month until you clear off the loan you took for the mortgaged asset.
Example:
For instance, if you have to pay off a loan of $200,000 for an asset you’ve mortgaged, at a fixed interest rate of 5%, and you have 30 years to pay it off. Then your amortization schedule will include a constant amount to be paid every month. However, the principal and interest amount may vary.

In essence, irrespective of the principal and interest amount for each month, the total amount to be paid for each month should be of the same value.

In this case, the amortization schedule might be such that every month for the next 30 years, you will have to pay an amount of $1073.64. However, in the first month, the principal amount and interest can be $240.31 and $833.33, respectively, while in the second month, the principal amount and the interest can be $241.31 and $832.33, respectively.

In both cases, when you add the two, you will get a constant value of $1073.64. This will go on for all the months till the 30-year period is over and the mortgage loan is paid off.