If you have ever had a car loan or even a mortgage loan then you have heard the term mortgage amortization. If you have ever wondered how it works and how your payments get applied keep reading!
Amortization is defined as as the reduction of debt by regular payments of interest and principal sufficient to pay off a loan by maturity. In simple terms it means, how your mortgage payment is distributed on a monthly basis showing how much goes to interest and principal each month. By understanding how the amortization of your loan works you are better able to understand how the balance is paid of monthly and yearly. By following an amortization schedule it will show you the amount of interest you will pay over the life of the loan assuming you hold the loan until its paid off.
(This chart shows how the mortgage principal begins to increase as the interest amount decreases)
If you were to obtain, let’s say, a 30-year fixed rate loan the first half of the term of that loan would go towards paying down the interest and paying very little towards the principal. This is important to note because if you are a homeowner that refinances (assuming you refinance into the same type of loan) every few years you will find yourself paying back a lot of interest and every time you refinance you go back to paying a good portion of the interest on your mortgage. This is not necessarily the case if you are more than half way through your loan term as you are now paying into a good portion of the principal. One important thing to consider, if you have already paid down […]