Amortization

Amortization is the process of paying off a loan through regular scheduled payments. Early payments are mostly interest; later payments shift toward principal. A 25-year amortization on a $300,000 seller-financed note at 5.5% produces a monthly payment of $1,834. In month one, approximately $1,375 is interest and $459 is principal. By year 20, the split reverses. Understanding amortization is essential for calculating balloon balances - if you have a 7-year balloon on a 25-year amortization, your payoff at year 7 is still roughly 90% of the original principal.