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Amortization (or amortisation) is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.
Applications of amortization
- When used in the context of a home purchase, amortization is the process by which loan principal decreases over the life of a loan, typically an amortizing loan. With each mortgage payment that is made, a portion of the payment is applied towards reducing the principal, and another portion of the payment is applied towards paying the interest on the loan. An amortization schedule, a table detailing each periodic payment on a loan, shows this ratio of principal and interest and demonstrates how a loan's principal amount decreases over time. An amortization schedule can be generated by an amortization calculator. Negative amortization is an amortization schedule where the loan amount actually increases through not paying the full interest.
- In business, amortization allocates a lump sum amount to different time periods, particularly for loans and other forms of finance, including related interest or other finance charges. Amortization is also applied to capital expenditures of certain assets under accounting rules, particularly intangible assets, in a manner analogous to depreciation.
- In tax law, amortization refers to the cost recovery system for intangible property.
- In computer science, amortized analysis is a method of analyzing the execution cost of algorithms over a sequence of operations.
- In the context of zoning regulations, amortization is the time in which a property owner has to conform or relocate when the property's use constitutes a preexisting nonconforming use under amended zoning regulations.
- Tax amortization benefit