Mortgage amortization is the systematic repayment of calculated interest and principal over a previously determined period of time. Basically, it is the process of repaying a mortgage loan through monthly payments. During mortgage amortization, the principal on a mortgage loan declines, as the borrower makes monthly payments. Each time a payment is made, a part of it goes towards reducing the principal, and another part of the payment goes towards paying the interest on the mortgage loan.
The Mortgage Amortization Process
When you take out a mortgage loan, the lender sits down with you to determine your monthly payments over the life of the loan. These payments must be something that you are comfortable with, that you can fit in your budget. These payments must be made on time and, more importantly, in full, including the interest and a portion of the principal, in order for the mortgage to amortize. When the mortgage loan is paid off, your mortgage is fully amortized.
In case the mortgage amortization is not happening, the lender must adjust your monthly payments, so that you are paying against the principal. This might make your monthly mortgage payments increase suddenly, which may cause financial issues.
When mortgage amortization starts, in the early years of paying off a loan, most of the monthly payments that you will make will be applied to the loan’s interest, and only a small percentage will go against the principal. As more of the principal is paid over the years, the interest starts to go down, which will lead to a much faster mortgage amortization in the later years of the loan. As a result, the equity that you will have in your home will also increase faster.
When using an online mortgage calculator, it is harder to figure out how much money you will be paying over the life of the loan. Online mortgage calculators use data such as your down payment amount, the total amount of your loan, and your interest rate to give you an estimate of how much your monthly payment will be, but they won’t help you figure out the total amount that you will be paying by the time your loan will be paid off. High interest rate loans and long mortgage loan terms can result in you paying thousands more on your mortgage, sometimes even double the original loan amount.
How to Calculate a Mortgage Amortization
Both fixed-rate and adjustable-rate mortgages fully amortize at the end of the term, whether it’s a 15-year adjustable rate mortgage or a 30-year fixed rate mortgage, with the condition that monthly payments are made on time.
To calculate a mortgage amortization, you need to have knowledge of a few key factors that are involved in your mortgage loan, such as the periodic interest rate and the loan balance. To find out the first month’s interest rate, you must multiply the loan balance by the interest rate. To find out the principal, you must subtract the interest from the total payment. To find out the interest and the principal for the next month, subtract the previous monthly payment from the mortgage loan balance, then repeat the steps described above.
The Amortization Schedule
The amortization schedule is a table that presents each payment from a mortgage in detail. Amortization schedules are generated by amortization calculators, and they show how much of each monthly payment is the interest and how much is going towards the principal balance. While a payment goes towards paying both the interest and the principal, the exact amount varies, and needs to be calculated with an amortization schedule.
When shopping for a mortgage loan, make sure you fully understand the mortgage loan process, your rights and what is expected of you. Various online mortgage calculators can be of great help, but always be aware of the lender’s rules and conditions. Taking that extra precaution before deciding on a mortgage loan can save you a lot of money and hassle in the long run.