Amortization is a payment plan that spreads a loan into equal monthly payments over time. Each payment includes both interest and a portion that pays down the principal, or the original amount borrowed. By the end of the loan term, you've paid off the entire debt.
You take out a $200,000 mortgage at 4% interest over 30 years. Your monthly payment might be $955. In your first payment, about $667 goes to interest and $288 reduces what you owe. Over 30 years and 360 payments, you pay off the full $200,000 plus interest.
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