Amortization

Definition of Amortization

  1. The process of gradually paying down the principal of the loan. As each payment toward principal is made, the mortgage amount is reduced or amortized by that amount. This is in contrast to an interest-only payment where the principal balance is never reduced. The normal amortization period for a mortgage in Canada is 25 years, but can be as short as 5 years.

Synonyms

  • pay-off
  • repayment
  • sum
  • amount
  • settlement
  • remuneration

Alternate Spellings

  • Amortize

Related Terms and Acronyms

  • Amortized Loan Definition,
    • A loan that is completely paid off, interest and principal, by a series of regular payments that are equal or nearly equal.
  • Additional Principal Payment Definition,
    • Extra money included with a loan payment to pay off the amount owed faster. Over time, this practice reduces the amount of interest paid.
  • Amortization Schedule Definition,
    • A detailed table showing the amortization of a loan which includes the beginning principal amount, period payments, the interest portion of each payment, the principal reduction portion each payment, and the ending balance. The Canadian Equity Group has developed a mortgage rate calculator which will generate a perfect example of an amortization schedule.
  • Simple Interest Loan Definition,
    • A method of allocating the monthly payment between interest and principal. The interest charged is determined by the unpaid principal balance on the loan, the interest rate, and the number of days since the last payment. The rest of the payment goes to the principal. Making early payments or additional payments reduces the loan's principal and cuts the total interest paid over the life of the loan.
  • Fixed Rate Mortgage (FRM) Acronym, Very Important,
    • A loan in which the interest rate and payments remain the same for the entire life of the loan. The interest rate and payment amounts are set at the time of loan origination.
  • Term Definition,
    • The length of time you commit to repay a lender or bank at an agreed upon interest rate and payment schedule. The interest rate usually remains constant during this term unless the commitment states otherwise. For example, a five year fixed rate mortgage has a term of five years.
  • Mortgage Renewal Definition, Very Important,
    • A renewal as it pertains to the mortgage industry is defined as having an existing mortgage term end and signing a new term to continue.
  • Simple Interest (SI) Acronym, Important,
    • Interest computed only on the principal balance, without compounding.
  • Conventional Mortgage Definition, Important,
    • A mortgage that is not insured or guaranteed by CMHC or GE Capital.
  • Biweekly Accelerated Payment Definition,
    • A mortgage that schedules payments every two weeks instead of the standard monthly payment. The 26 biweekly payments are each equal to one-half of the monthly payment. The result for the borrower is a substantial reduction in interest payments because the mortgage is paid off sooner.
  • Balloon Mortgage Definition,
    • A loan that has regular monthly payments which amortize over a stated term but call for a final lump sum (balloon payment) at the end of a specified term, or maturity date, such as 10 years.
  • Interest Rate (IR) Acronym, Very Important,
    • The rate a lender charges an individual to borrow money.
  • Reverse Mortgage Definition, Important,
    • A loan that allows an older homeowner to convert built-up equity into cash. The loan comes due when the owner dies, sells the house or moves out.
  • Loan Term Definition,
    • The period specified in the promissory note for a borrower to pay a loan, such as a mortgage. Most conventional mortgages have a loan term of 5 or 10 years.
  • Negative Amortization Definition,
    • A gradual increase in loan debt that occurs when the monthly payment does not cover the entire principal and interest due. The shortfall is added to the remaining balance which creates "negative" amortization.
  • Reconveyance Definition,
    • The transfer of title to the borrower after a mortgage has been paid fully.
  • Amortization Term Definition,
    • The time required to amortize (repay) an entire mortgage loan.
  • Pre-computed Loan Definition,
    • With a pre-computed loan, the interest owed over the life of the loan is calculated using a standard amortization table. After signing for this type of vehicle loan, the borrower is obligated to pay back principal plus the full amount of interest that will accrue over the entire term of the loan.
  • Mortgage Calculator Definition, Very Important,
    • A program that calculates the costs involved in a mortgage or determines what kind of mortgage a person can qualify for.
    CanEquity's mortgage calculator has been rated number one by the Globe and Mail.
  • Pre-payment Definition,
    • Applying additional payments towards the balance of a mortgage loan.
  • Compound Interest Definition,
    • Interest that is calculated by adding the interest earned in the current period to the principal and figuring the next period's interest on this "compounded" total amount.
  • Amortization Period Definition,
    • The amount of time it will take to pay off a mortgage by making routine payments.
  • Amortization Table Definition,
    • A mathematical formula used to calculate monthly mortgage payments based on the borrowed loan amount, the interest rate, and the loan term.
  • Variable Rate Mortgage (VRM) Acronym, Very Important,
    • Home loan in which the interest rate is changed periodically based on a standard financial index. Also called an "Adjustable-rate Mortgage."
    A type of mortgage loan offered by brokers and lenders.
  • Remaining Term Definition,
    • The time it will take to pay off the rest of an instalment loan as scheduled.
  • Interest Adjustment Date Definition,
    • The date one month prior to the beginning of amortization when accrued interest computed on the monies advanced becomes due.
  • Modification Definition,
    • A change in terms of the loan agreement.
  • Interest Only Payments Definition,
    • A payment plan where only the interest is paid off.
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