Amortization describes how a loan balance is paid down over time. Each payment covers both interest and principal, with the interest portion decreasing and the principal portion increasing as the balance falls.
Monthly Payment = P × [r(1+r)ⁿ] ÷ [(1+r)ⁿ − 1]
Where P = loan amount, r = monthly rate, n = number of payments
A 30-year, $300,000 loan at 7% has a monthly P&I of $1,996. In year 1, roughly $1,745/month goes to interest and only $251 to principal. By year 30, that flips completely.
Investors use amortization schedules to calculate total interest paid, equity buildup, and remaining balance at any point.