Amortizing loans match how banks receive money and how they pay it out.
When you have a savings account with the bank, it earns a certain interest rate monthly, say 0.5% monthly for a 6% annual rate. If they were to loan that money out, they would need to earn more interest on the loan than they pay in interest (otherwise they would go out of business). So they may charge 0.75% interest monthly, or a 9% annualized rate. The borrower pays a % of the current loan balance every month, plus some principal, so that the entire loan is paid off in 30 years with a constant monthly payment. As the principal is paid down, the amount of interest is reduces, and more and more of the payment goes to paying down the loan.
That's why loans are amortized - to match income for the bank with the interest they pay out. It's actually fair to both parties. You pay a percentage of the outstanding loan balance every month that is reduced as time goes by.
Amortization makes more sense if you think of the interest rate as the amount charged as a percentage of the outstanding amount for each period. As you pay down the loan, the rate stays the same and the interest goes down accordingly. "amortization" is just a mechanism to make the monthly payment constant while holding to that definition of "interest".
One could just as well use a fixed principal amount, which would mean that the payments would start high and get lower as principal was paid off. But that is typically contrary to most people's budgets that increase over time as you get raises, etc.
Isn’t a 20% return on investment profitable enough for banks?
Not if that loan is spread over 30 years. A 10% gross return over 30 years is only 0.3% compounded annually (1.003 ^ 30 = 1.1).
Paying interest upfront would actually be worse for borrowers in many cases, specifically when they refinance or sell the collateral. Suppose you got a loan with a 20% upfront interest fee, and decided to move after 3 years. You'd have paid all of the interest upfront, but only had the loan for 1/10 of the time! Plus, you'd have to get another loan for the new house, and pay interest upfront again!
There are examples of "upfront interest" loans, though:
Many predatory car dealers do charge interest upfront by adding it to the total amount owed, so if you finance a $10,000 car, you actually borrow $15,000 and have to pay the whole amount back even if you sell the car early. These are often geared to less creditworthy borrowers that they assume will not pay it back, will repossess the car and sure the borrower for the rest.
Retailers sometimes offer "0% interest" loans on consumer items where they just increase the retail price to account for a certain interest rate. You can sometimes (not always) negotiate a better price if you pay upfront with cash (not a credit card, since they change the retailer 2-3%) on large items.
"Payday loans" charge interest upfront - even if you pay back the loan early, you still owe the full amount of interest (typically classified as a "fee" to avoid usury laws).