Blog

What is Mortgage Amortization?

What is Mortgage Amortization?

May 8th, 2019 | Credit, Interest Rates

If you have a fixed-rate home mortgage, you pay the exact same amount each month. But did you know that the amount of principal you pay toward the balance of your loan changes from month to month? This is called amortization and it is a method of distributing the interest and principal over the course of a loan so that it is completely paid off by the end of the loan term. Understanding how it works could help save you plenty of interest on your mortgage.

How does it work?

When you agree to buy a house at a certain price, in reality, you will end up paying way more than that price to your lender over the life of the loan. That is because you are charged interest by the lender in order to make the deal worth their while. To make sure that you do not end up with a giant interest payment at the end of your mortgage, lenders create amortization schedules to include both interest and principal into your monthly payments. However, to make sure they recoup more of their money at the beginning of the loan, your initial payments will end up going almost entirely towards interest. Gradually over time, more of your payment will go towards principal until by the last few years of payments, you are contributing almost nothing in interest.

Here is an example: Say you purchase a home for with a 30-year fixed-rate mortgage of $250,000 with a 4% interest rate. Over the life of the loan you will pay $179,674 in interest. Your monthly payment will be roughly $1,193. The first payment you make will include $833 for interest charges and only $360 for principal. After that payment, your loan balance decreases to $249, 640 and the interest is recalculated for that amount. Your next payment will be made up of an $832 charge for interest and a $361 contribution to principal. The balance will continue to shift every month until your very last payment will include $1,149 for principal and just $4 in interest.

Refinancing

Every time you refinance your loan you reset your amortization schedule and you will start paying a majority in interest each month. This can make it harder to pay off your mortgage as fast as if you had not refinanced. When you refinance, make sure that the interest savings you get is worth having to start paying a lot of upfront interest again.

Larger Payments

If you are interested in paying off your loan faster without refinancing into a shorter mortgage, you can start making larger payments or a few extra payments each year. This amount can be applied to the loan principal, which will reduce your loan balance and force the interest to be recalculated for future payments. This can save you thousands of dollars in interest and shave years off your loan.

Understanding how your principal and interest is calculated can help you manage your mortgage loan debt better. It can guide you as you consider when and if to refinance as well as whether to try to pay off your loan faster. In the end, understanding mortgage amortization can help you save money over time.

Comments



Leave a Comment

Contact Us


Not readable? Change text.


docs

Required Documents

VA Loans

Veteran Loans

Disclaimer:
Prime 1 Bancorp, Ltd is not affiliated with any government organization or bank nor do we act on behalf of the FHA or VA. This material is not from HUD or FHA and has not been approved by HUD or a government agency. We are not a Federally chartered or State Chartered Bank. We are an we are an Illinois Residential Mortgage Licensee by the Office of Banks and Real Estate License #MB.6761138, a Colorado Registered Mortgage Brokerage by Division of Real Estate, a Florida Residential Mortgage Brokerage Licensed by the Office of Financial Regulation License #MBR1930 dba Prime 1 Mortgage Inc, a California CFL Licensed Mortgage Brokerage by Department of Business Oversights 60DB055973 and a Texas SML Licensed Mortgage Brokerage by the Texas Department of Savings and Mortgage Lending. Prime 1 Bancorp, LTD Corporate Office is located at 2720 S. River Rd Suite 50, Des Plaines, IL 60018 our Toll Free Number is 888-205-3737. NMLS: 1434638

Loan product availability is subject to qualification of the borrower and loan approval after full review of the file. Not every applicant qualifies or is eligible for every loan program. Some loan products may not be available in all states. Loan approval, note rate and annual percentage rate are dependent on factors including, but not limited to, credit, collateral, income, assets and overall financial history. Not all applicants will be approved for a loan. All loan programs, terms and annual interest rates are subject to change without notice. NMLS: 1434638