An annuity is a payment of a fixed sum of money to a lender at set intervals that are decided at the start of the annuity. Most annuities are paid off month to month. Every time a buyer agrees to pay a lender in monthly installments, the buyer is agreeing to an annuity. An example of this would be a 15-year or 30-year mortgage. At the start of the mortgage, the lender decides how much money it is going to lend the buyer, calculates the principal value of the loan and then any interest. Additional money needed for an escrow account may be added. The mortgage company then calculates the monthly payment the mortgage requires for the entire 15- or 30-year term. Most mortgages are front loaded meaning that initial annuity payments pay off the interest owed before the payment will pay down the principal.
