Final answer:
Amortization is the process by which mortgage payments are divided into interest and principal portions, with the latter reducing the mortgage balance over time. It is critical in real estate investing to understand how these payments affect loan balances.
Step-by-step explanation:
The portion of Sarah's mortgages that is applied to the principal of each loan is considered amortization. This is the process whereby each mortgage payment is split into two parts: one part goes towards paying the interest on the loan, while the other goes toward reducing the principal balance of the mortgage. Over time, the interest portion decreases and the principal portion increases, which means more of each payment goes toward the loan balance.
It's important to note that amortization is distinct from other financial terms such as interest payment, tax deduction, and insurance premium. Specific to real estate investing, amortization schedules are crucial for investors to understand how much of their loan payments go toward paying down the loan versus paying interest.