Amortization – When a loan is amortized, the monthly payment amount is based on a formula that usually will reduce the principal amount of your loan to zero at the end of a specific time period, for example 30 years. Initially, most of the payment goes to interest but over time more of the payment goes to principal until it is all paid off.

Some loans can have negative amortization, meaning that the principal balance on the loan actually increases. Reverse mortgages are one example of this.