What is Amortization?
If you are in the process of applying for a mortgage loan or if you already have a mortgage, you’ve probably heard the term “amortization” at some point in your mortgage journey. Amortization is an accounting term. In terms of a mortgage loan, amortization means that your loan payments will be spread out over time. Your loan balance is split up into equal payments over a set period of time defined in your loan terms. Each month, part of your mortgage payment will go toward interest and part will go toward reducing your overall balance. By the time your last mortgage payment is made, your loan will be fully paid off!
Here are some key details to understand about amortization and how it affects your mortgage:
Amortization is for Installment Loans
Installment loans are loans that borrowers must repay with regularly scheduled payments, or installments. Installment loans include car loans, personal loans, and of course mortgage loans. Interest-only loans and lines of credit, like credit cards and HELOCs, are not amortized.
Amortized Loans Have Fixed Payments
Fixed payments mean that your payment amount will be the same month to month over the loan term. Having the same payment amount each month allows you to easily plan your budget with the set payment amount. However, there is one exception to having a completely fixed payment: If your mortgage payment includes escrow costs, your payment may vary years at a time due to those costs rising or falling.
Early Payments Go Toward Interest
With amortized loans, a larger portion of your payment will go toward paying down your interest at the beginning of your loan term. Then as you get farther along in your loan repayment, more of your payment will go toward the loan’s principal, meaning more of your payment goes to paying down your overall loan balance. Though your payment will remain the same each month, the amount of your payment that goes to interest and principal will change inversely over the life of the loan.
You Have an Amortization Schedule
When you finalize your mortgage loan, you will have access to an amortization schedule that shows you how your loan payments break down. An amortization schedule is a table of your scheduled loan payments that shows the amount of principal and interest that make up each payment until your loan is paid off at the end of its term. While your payment amount remains the same each month, your amortization schedule shows you how the percentage of your payment that goes toward interest will decrease over time as the percentage that goes toward principal will increase. An amortization schedule can help you plan ahead as a homeowner.
If you’re ready to apply for a mortgage loan, let our team help you get the loan you need. Visit our Mortgage Loan Center to learn more about the mortgage process, use our Home Buying Calculators to get a picture of what your home loan will look like, and check out our Buying a Home video series on YouTube for more information about home buying. Apply for a mortgage loan online or set up an appointment to speak with one of our Mortgage Loan Officers.
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