Buying your first home is exciting, but it can also feel overwhelming at times. Not only are you making a big investment, but you’re exposed to what can be a very lengthy and complicated process. You’ll likely hear some new terms for the first time, some of which may sound confusing. One example is “home loan amortization.”
Below, we’ve explained what loan amortization is and how it works in real estate.
What Is Mortgage Amortization?
Mortgage amortization is the process of paying off your home loan over time with regular payments. If you have a fixed-rate loan, then your payments will remain relatively the same from month to month. If you have an adjustable-rate mortgage, your payments may change depending on whether your rate rises or falls. Regardless of whether you have a fixed-rate mortgage or an ARM, amortization means the same thing, which is making payments on your loan over time.
How Does Loan Amortization Work?
A home loan amortization schedule dictates how the loan is paid down. It details the exact amount you’ll pay each month.
Typically, in the beginning, your mortgage payments go mostly towards the interest. During the later years, your payments start to go more towards the principal.
The slow shift from mostly paying interest to paying principal is amortization.
The Mortgage Amortization Formula
A very specific formula is used to determine your loan amortization schedule. The formula to calculate the monthly principal on an amortized loan is:
Principal Payment = Monthly Payment – [Outstanding Balance x (Interest Rate / 12 Months)]
Understanding Your Amortization Schedule
Understanding your amortization schedule is important because it helps you understand how your mortgage works. It gives you a clear idea of what portion of each payment goes towards paying the interest and what portion goes towards paying the principal.
Your amortization schedule also gives you an idea of how you’ll build equity over time. Generally, the more principal you pay, the more equity you have.
Contact Mortgage Solutions Financial Today!
Understanding the terms of your home loan before you borrow is an essential part of the process. You need to know the details of your investment so you can make a responsible, informed decision. If you have any questions about mortgage amortization or home loans in general, please do not hesitate to contact our office. We will be more than happy to discuss your concerns in detail and answer any questions you may have.