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The process of paying off a debt over time through regular payments. Each payment covers both principal and interest, with early payments being mostly interest and later payments being mostly principal.
On a $200,000 30-year mortgage at 7%, your first payment of $1,331 includes $1,167 interest and only $164 principal. By year 20, it flips to $400 interest and $931 principal.
Monthly Payment = P × [r(1+r)^n] / [(1+r)^n - 1], where P = principal, r = monthly rate, n = number of paymentsUnderstanding amortization helps you see why extra payments early in a loan save the most interest.