1 · Start with the idea
On a typical fully amortizing loan, part of each payment covers interest that has built up, and the rest reduces the amount still owed. As the balance gets smaller, the split changes.
Foundations · 3 / 8
How can one monthly payment do two jobs?
How families borrow money to buy a home
2 · Picture it
If a payment is $2,400, perhaps about $2,000 goes to interest at the beginning and about $400 reduces the balance. Later, less may go to interest and more to principal because the balance is smaller.
3 · Now learn the English words
amortizationpaying a debt down over time through scheduled payments
principal balancethe principal amount still owed
4 · Why this matters
This explains why a borrower can make payments for years and still owe a large amount. It also explains why paying principal down earlier can reduce future interest.
5 · Check yourself
In a normal amortizing payment, what are the two main jobs of the payment?
Show answer
It pays interest and reduces principal.
Source
StateCourse California Mortgage Loan Brokering & Lending · Lesson 02