AMORTIZATION
- Does it apply to mortgages – if it does, how so?
- What else does it apply to?
- What is an Amortization schedule?
Let us break amortization down in my blog post below! Remember, knowledge is key when it comes to anything in real estate and mortgage industry.
Amortization is a word you will hear every real estate investor and mortgage broker use especially when its about Home Equity Loans.
With any type of home equity loans i.e. first mortgage, second mortgage , amortization plays a huge role for deriving the actual cost of borrowing.
What is An Amortization?
Essentially, it is paying off a debt with a fixed repayment schedule; done in regular, timely installments over a period of time. To answer my question above, this can be done with something like a mortgage or a car loan.
Before I continue, I want to share a great piece on the Amortization of Loans, from Investopedia.
“On auto loan and home loan payments , at the beginning of the loan term, most of the monthly payment goes toward interest. With each subsequent payment, a greater percentage of the payment goes toward the loan’s principal. For example, on a five-year $20,000 auto loan at 6% interest, the first payment of $386.66 allocates $286.66 to principal and $100 to interest. The last monthly payment allocates $384.73 to principal and $1.92 to interest.”
What is An Amortization Schedule?
An schedule is a table of periodic loan payments, which displays the amount of principal, and the amount of interest that each payment is comprised of. Additionally, this maps out the payments until the end of the loan term.
Note: As the mortgage payments are made the amortization schedule shows the interest portion of the mortgage payment goes down and principal portion increases.
How to Benefit From it?
A great and well known advantage of amortization is that with each successful payment, the borrower builds equity in the asset. Fast-forward to the final payment, the borrower will own the asset. Note: should the loan have a mortgage rates fixed, the borrower’s payment amount stays the same.
Your bank must provide you the full amortization schedule for the full term of the loan that you have signed with them. Even a good 2nd mortgage provider should do that.
Don’t forget about the amortization schedule, and learn how to leverage your position with this newly found knowledge and become mortgage free faster… Isn’t this your ultimate goal?!
LONGER AMORTIZATION PERIODS
Reduce Monthly Payment
Loans with a longer period have smaller monthly payments due to the fact that there is a lot of time available to pay back the loan (as seen in the figure below).
This is a good strategy if you want payments that are more manageable. The following figure shows an abridged example of an amortization schedule for a $200,000 30-year, fixed-rate loan at 4.5%: Source
| Month | Payment | Principal Paid | Interest Paid |
|---|---|---|---|
| 1 (first payment) | $1,013.37 | $263.37 | $750.00 |
| 2 | $1,013.37 | $264.36 | $749.01 |
| 3 | $1,013.37 | $265.35 | $748.02 |
| 180 (15 years) | $1,013.37 | $516.62 | $496.75 |
| 240 (20 years) | $1,013.37 | $646.70 | $366.67 |
| 300 (25 years) | $1,013.37 | $809.53 | $203.84 |
| 360 (final payment) | $1,013.37 | $1009.58 | $3.79 |
SHORTER AMORTIZATION PERIODS
Increases Monthly Payments & Saves You Money
If choosing a shorter period is your preference – for example, 15 years – you will have higher monthly payments, but you will also have a lot less interest over the life of the loan, and you will be mortgage free sooner.
This is a good strategy if you can comfortably meet the higher monthly payments without undue hardship. Source
| Month | Payment | Principal Paid | Interest Paid |
|---|---|---|---|
| 1 (first payment) | $1,529.99 | $799.99 | $750.00 |
| 2 | $1,529.99 | $782.91 | $747.08 |
| 3 | $1,529.99 | $785.85 | $744.14 |
| 60 (5years) | $1,529.99 | $976.38 | $553.60 |
| 120 (10years) | $1,529.99 | $1,222.23 | $307.75 |
| 180 (final payment) | $1,529.99 | $1,524.27 | $5.72 |
To come out as a winner you should carefully select a mortgage product which allows you to pay off your home mortgage faster.
A good mortgage broker expert is your best friend. As a friend you are invited to download mortgage calculator app & pre qualify yourself for next mortgage under mortgage stress test. which is very accurate in calculations and much more.
REALTORS LOVE IT, SO WILL YOU!.