What does "amortization" mean in the context of real estate?

In real estate, "amortization" refers to the gradual payment of a debt through scheduled payments. This concept is particularly important in the context of mortgages, where borrowers make regular payments that cover both the principal amount borrowed and the interest on the loan. Over time, as these payments are made, the outstanding balance of the debt decreases.

The amortization schedule is a critical tool for understanding how much of each payment goes toward interest versus how much goes toward reducing the principal balance. This process ensures that the debt is paid off over a specific period, typically 15 to 30 years for residential mortgages. Understanding amortization helps borrowers plan their finances effectively and assess the total cost of the loan over its term.

Other options describe related but distinct concepts. Evaluating property value does not involve debt reduction, while the increase in property value over time and the cost of borrowing money pertain to the financial aspects of real estate but do not specifically address the repayment structure of a loan.