Amortization

Amortization involves the payment of both principal and interest in periodic installments for the term of the loan.  A fully amortizing loan has payments of specific periodic amounts of principal and interest that results in the gradual reduction of the loan balance until the loan is paid in full.  Amortization more generally refers to the conditions of repayment of a debt such as a mortgage.  An interest only mortgage would be a non amortizing loan since there is no scheduled reduction in principal.  A balloon mortgage would be a partially amortizing loan since the loan payments will reduce the principal of the loan until the final balance is due at the balloon date or final payment date.

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