If you are getting a mortgage to buy a home, you need to know what mortgage amortization is and how understanding it can save you money!
If you’re only just starting to look at homes for sale or maybe you’ve already found the home of your dreams, you’re probably thinking about the huge financial commitment of a mortgage. It is very important that you are getting straight answers to help you make the right choices throughout the mortgage process.
Mortgage amortization can be a unfamiliar term but knowing exactly what it means can help you enjoy a more secure financial future. And it could save you a ton of money!
What is Mortgage Amortization?
Amortization is the gradual lowering of a debt over the life of the loan. Mortgage amortization refers to paying off your mortgage by making the regular payments. Some of each monthly payment goes to the price of the property and some goes towards the interest. If you make a higher monthly payment than required then you can pay less interest over time. If you have a shorter amortization period, you can pay less for your property.
It may surprise you to find out that the majority of your early payments on a mortgage go towards the interest. For example, in a 30-year mortgage over 83% of your payments are used to pay down interest in the first year compared to only 3% of your payments being used to pay interest in the final year. This is why you don’t build as much equity in the initial years of a mortgage loan.
There are many different home loans available and you must decide what is best for you. I suggest that the majority of home buyers get a fixed-rate mortgage. Fixed-rate mortgages give you a secure option because your interest continues to be the same for the duration of your mortgage. The most popular fixed-rate mortgage is a 30-year but there are also 15- and 20-year fixed-rate mortgages.
After you finish the mortgage application, you should ask for the amortization schedule for your house loan from your lender. This is an important document that explains how much principal and interest are paid each month.
This will give you the true cost of your property over the duration of the mortgage. The mortgage amortization schedule lets you determine the real cost of the property after all of the interest is paid.
Why You Should Pay Down Your Mortgage Sooner
While you only need to make the required monthly mortgage payments, I suggest thinking about paying extra. Paying extra every month can really boost your money situation over time. Since the initial years of your home loan consists of paying mainly interest, it can take a while to break even. By making extra payments or larger monthly payments, you could substantially decrease how much you owe and pay off your home much sooner.
What’s Best For You?
Making bigger monthly payments or extra payments can reduce how much you owe but doing this could put you in a bind. You always want a monthly mortgage payment that is super easy to make so you’re not struggling to pay your bills or unable to enjoy life.
Paying off your mortgage faster is fantastic but if it will affect the quality of your life then you should reconsider. I suggest you read How to Avoid Being House Poor
There is plenty of stuff about the mortgage process that can be confusing. Hopefully, mortgage amortization isn’t one of those things anymore! If you are thinking about how much house you can afford or qualify for, you really should get in touch with the mortgage professional of your choice for more information.