What does the term 'amortization' relate to in real estate loans?

The term 'amortization' in real estate loans refers to the gradual repayment of a loan over time. This process involves paying off the principal and interest of the loan through regular, scheduled payments, typically on a monthly basis. In each payment period, a portion goes towards reducing the principal balance while another portion covers the interest expenses. Over the life of the loan, the amount applied toward the principal increases, and the interest decreases, reflecting the decreasing balance of the loan.

This structured repayment method is critical for borrowers to understand, as it affects the total financial obligation over the loan term and helps in planning budgets. Proper amortization ensures that the borrower eventually pays off the loan in full by the end of the loan term.