Amortization: How mortgage amortization works on your home loan
Amortization is the process of paying off a debt, in this case your mortgage, over time through regular payments. Watch and learn more about how it works.
In this video Ja Yung, a mortgage banker, explains: “Amortization is the relationship between the principal and interest portion of your payment. As the time goes on, you pay less interest and more principal”.
An amortization schedule is a table that details the amount that is allocated to principal and to interest on each monthly payment. It provides the exact amount still left on your loan after you make a payment.
There are five columns in the schedule:
1. Time period
2. Outstanding balance
5. Principal paid
With a 30-year fixed-rate mortgage loan amortization, the monthly mortgage principal and interest payment over the term of the loan does not change. You pay the same amount every month. For example, if you take out a loan for $350,000 at a 4.25% annual interest rate, you pay $1,721.79 each month. You pay back the principal of the mortgage and the total compounded interest ($269,844.26) in exactly 360 monthly installments.
A few things to keep in mind in regards to amortization:
• Making additional or larger payments each month helps save money in the long term. Why? Because the extra money you pay reduces the amount of interest you pay in the long run, as long as you specify you want additional payments to go towards your principal balance.
• If you only plan to be in a home short term, it is important to remember that you will owe a majority of the principal when you go to sell since you pay more interest in the beginning.
JA YUNG: Amortization is the relationship between the principal and interest portion of your payment. As the time goes on, you pay less interest and more principal.
JA YUNG: Your mortgage payment actually stays the same. So while you, over time, may pay less in interest, you actually have more of your payment going towards principal, which is ultimately paying down the principal of your loan.
JA YUNG: The amortization schedule is a layout. It’s basically kind of like a map of, let’s say, 30 years if that’s how long your loan is, and it will tell you payment by payment exactly how much of it is going towards principal and how much of it is going towards interest.
JA YUNG: It’s important to keep in mind because of the fact that you have to remember that you do pay a larger portion of the interest in the beginning of the loan. So if you are thinking about going into a home and maybe it’s a starter home, you’re only going to be there for three to five years, when you go to sell that home, you’re going to owe a majority of that principal balance still because most of that period has been paying interest.