AMORTIZING MORTGAGE Meaning and
Definition
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An amortizing mortgage refers to a type of home loan that requires the borrower to make regular payments over a set period, commonly known as the mortgage term, in order to gradually reduce the principal amount borrowed along with the associated interest. The term "amortize" means to gradually pay off a debt with regular installments, which creates a systematic repayment schedule.
Under an amortizing mortgage, the borrower makes fixed monthly payments that typically remain constant throughout the tenure of the loan. A portion of each payment is allocated towards the principal, reducing the outstanding balance, while the remaining portion goes towards the interest charges. This results in the principal balance diminishing over time, leading to an eventual full payment of the borrowed amount.
The amortization schedule is a critical aspect of an amortizing mortgage as it outlines the specific breakdown of payments, indicating the amount applied towards interest and principal for each installment. Initially, a larger proportion of the payments goes towards interest, with a smaller portion paying down the principal due to the higher outstanding balance. However, over time, the principal balance decreases, causing a greater portion of the payment to be allocated towards principal and less towards interest.
Amortizing mortgages are commonly used for long-term property financing since they efficiently distribute the repayment burden over numerous years until the principal is extinguished. This type of mortgage provides stability and predictability for borrowers, as they know how much to pay each month and have a clearer understanding of when the mortgage will be fully paid off.
Etymology of AMORTIZING MORTGAGE
The word amortizing comes from the Old French term amortisir, which means to bring something dead to life or to extinguish. This term, in turn, is derived from the Latin word ad meaning to and mors, meaning death. The term originated in the context of extinguishing or paying off a debt gradually over time.
The word mortgage comes from a combination of two Old French terms: mort, meaning dead, and gage, meaning pledge. The term originally referred to a pledge or agreement that ended (or died) once the debt had been repaid.
When combined, the term amortizing mortgage refers to a type of mortgage loan where the borrower makes regular payments that gradually reduce the principal amount and interest over time until the debt is fully repaid or dead.
