If you’re working on getting a mortgage for the first time, congratulations! You’re about to embark on a brave new adulthood adventure. Like most adventures, there will be highs and some lows. One of the highs will be when you finally find the perfect home in your price range. As for the lows, one of them might be trying to understand all the jargon that comes with buying a house.
All home-buying terminology can be slightly intimidating. What is the difference between prequalification and preapproval? Why are there so many different types of mortgage loans? What in the world is escrow? And what does amortized mean?
Well, we’re going to break down mortgage amortization quickly and painlessly. Basically, it’s just saying that your mortgage loan is spaced out over a set amount of time (often 30 years), and its calculated so that you always pay the same amount per month, unless you have a variable rate mortgage. That means that if you pay $1,500 for a fixed-rate mortgage in your first month, you’ll pay $1,500 in the last month of your mortgage.
If you take out a variable-rate mortgage, the amount you pay will change as the market rate fluctuates.
Of course, just because you’re paying the same amount doesn’t mean that your money is going toward the same thing each month. In fact, your first mortgage payment will primarily go toward interest, whereas your last mortgage payment will go primarily toward the principal. Throughout the life of your loan, this will gradually shift as more of your principal is paid off, thereby generating less interest.
Why do people amortize their mortgages?
Mortgage amortization ensures you stick to your term length. So if you took out a 30-year mortgage, then the amortization helps guarantee that you’ll be done paying it off in 30 years. Amortization also keeps all your payments the same, instead of having you pay different amounts depending on how much your principal is. If you take out a fixed amortized mortgage, you’ll pay the same amount every month.
How to Calculate Amortization Using Tables
Ever feel like there just aren’t enough opportunities to do math since graduating high school? Learning to calculate an amortized mortgage will let you experience the pure joy of populating charts again. Calculating your amortized mortgage really puts you on the front lines of home buying.
If you take out a $100,000 mortgage over 10 years at a 5% fixed interest rate, your monthly payment will be $1,061. You can then divide your interest rate by 12 equal monthly payments, and it works out to 0.4166% of interest per month. That means in your first month, you’ll pay around $417 toward interest and $644 toward your principal.
Next, you need to deduct your monthly payment from the starting balance to get the ‘balance after payment’ for the chart. You’ll also need to put the $417 you paid in interest and $644 you paid toward the principal in the chart. Then you can repeat the calculation of your monthly interest and principal breakdown, and continue inputting until you finish completing the chart.
How to Calculate Amortization Using a Calculator
Did your eyes glaze over while trying to understand that table? You can save yourself the trouble by using an online amortization calculator . All you have to do is input info about your mortgage, including the amount you’re borrowing, your term length, and the interest you’re paying, and it will do the calculation for you.
What are the pros of an amortized mortgage?
1. You will slowly but surely pay off the principal of your home. With every month, you’ll get closer to burning your mortgage papers! Who doesn’t like a bonfire?
2. Mortgage amortization ensures that you pay a set amount over the life of your loan, rather than more at the beginning or the end, like you would with a balloon mortgage. A balloon mortgage requires you to pay interest charges monthly during the regular term. You then pay off large parts of the principal at the end of the loan period. (Thus, your payment literally balloons.)
3. You can often get better terms with an amortized loan. And you will save money by paying less interest over the life of your mortgage.
What Are the Cons of an Amortized Mortgage?
1. Amortized mortgages favor borrowers who are putting down a larger down payment. To qualify for a competitive interest rate, you’ll probably need to put down 10% (if not 20%).
2.You might not be able to qualify to borrow as much money via an amortized mortgage as you would through an alternative mortgage, such as an interest-only mortgage or a balloon mortgage.
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