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Mortgage Amortization: You Need To
Understand How Your Mortgage Works
Understand How Your Mortgage Works
All homeowners and real estate investors should know how the amortization of a mortgage
works. Understanding how your mortgage amortization works will allow you to put together a
strategy to pay off the mortgage sooner.
With the exception of an interest only mortgage, each mortgage payment is a combination of
principal and interest. The principal payments reduce the amount owed on the mortgage.
Therefore the more principal you apply to the loan, the faster the loan is paid off. The interest
is the cost of borrowing the money. The larger this amount is, the happier your lender will be.
Amortization schedule.
An amortization schedule is usually given to the homebuyer when a house is purchased. This
document contains some very important information. Take a look at the column that says
"balance" or "mortgage balance". You will notice that this amount gets smaller as you get
deeper into the term of the mortgage. This is a great example of a declining balance.
Interest.
Another column of information you should check is "interest". This is the money the lender
collects for his investment, lending you money to buy a house. Some amortization schedules
gives another column that gives a "running total" for the interest. This allows you to see how
much you have paid in interest at any specific period.
Principal.
Finally, check the column "principal". You can consider this your equity. Every principal
payment reduces the mortgage balance. As you bring down the "mortgage balance" you
increase your equity in the house. Another way of increasing your equity is through market
conditions. A hot market increases the value of the house quicker.
Amortization period.
The amortization period is also important to your pocket book. The 30 and 15 year mortgage
are very common. In the 30 year, you will pay more in interest and your monthly mortgage
payments will be smaller. If your budget allows always choose the shorter period. Your
monthly payments will be higher, but you will pay off the mortgage in a shorter period.
Negative amortization.
If your monthly payment is less than the interest portion, you will create a situation of
"negative amortization". Negative amortization occurs when you owe more than the original
loan. You have to pay attention to any amounts added back to the balance owing. For
example, if an interest payment of $500 is required and you pay only $350, the shorted
amount of $150 is added to the mortgage balance. At this rate you will get deeper and
deeper in debt. The lender usually allows negative amortization to continue foe about five
years. After the five year period has been reached, the lender will then "re-amortize" the loan.
The new amortization period is then reset at 25 years.
works. Understanding how your mortgage amortization works will allow you to put together a
strategy to pay off the mortgage sooner.
With the exception of an interest only mortgage, each mortgage payment is a combination of
principal and interest. The principal payments reduce the amount owed on the mortgage.
Therefore the more principal you apply to the loan, the faster the loan is paid off. The interest
is the cost of borrowing the money. The larger this amount is, the happier your lender will be.
Amortization schedule.
An amortization schedule is usually given to the homebuyer when a house is purchased. This
document contains some very important information. Take a look at the column that says
"balance" or "mortgage balance". You will notice that this amount gets smaller as you get
deeper into the term of the mortgage. This is a great example of a declining balance.
Interest.
Another column of information you should check is "interest". This is the money the lender
collects for his investment, lending you money to buy a house. Some amortization schedules
gives another column that gives a "running total" for the interest. This allows you to see how
much you have paid in interest at any specific period.
Principal.
Finally, check the column "principal". You can consider this your equity. Every principal
payment reduces the mortgage balance. As you bring down the "mortgage balance" you
increase your equity in the house. Another way of increasing your equity is through market
conditions. A hot market increases the value of the house quicker.
Amortization period.
The amortization period is also important to your pocket book. The 30 and 15 year mortgage
are very common. In the 30 year, you will pay more in interest and your monthly mortgage
payments will be smaller. If your budget allows always choose the shorter period. Your
monthly payments will be higher, but you will pay off the mortgage in a shorter period.
Negative amortization.
If your monthly payment is less than the interest portion, you will create a situation of
"negative amortization". Negative amortization occurs when you owe more than the original
loan. You have to pay attention to any amounts added back to the balance owing. For
example, if an interest payment of $500 is required and you pay only $350, the shorted
amount of $150 is added to the mortgage balance. At this rate you will get deeper and
deeper in debt. The lender usually allows negative amortization to continue foe about five
years. After the five year period has been reached, the lender will then "re-amortize" the loan.
The new amortization period is then reset at 25 years.
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