Amortization

In the context of finance and real estate, amortization refers to the process of paying off a debt (often from a loan or mortgage) over time through regular payments. A portion of each payment is for interest while the remaining amount is applied towards the principal balance. The percentage of interest versus principal in each payment is determined in an amortization schedule.

In the context of real estate financial modeling, amortization plays a key role in determining the cash flows associated with a property. The amortization schedule impacts both the interest expense (which is a tax-deductible expense) and the reduction of the principal loan balance over time.

The length of the amortization period can significantly affect the size of the required monthly payments and the total interest paid over the life of the loan. Loans with shorter amortization periods generally have larger monthly payments but lower total interest costs, while loans with longer amortization periods have smaller monthly payments but higher total interest costs.

Note: In the context of accounting, the term 'amortization' also refers to the gradual reduction of an intangible asset's value over its useful life, similar to 'depreciation' for tangible assets.