For most people, buying a home represents a considerable financial achievement. Even while the fundamentals of a mortgage, including the interest rate and monthly payments, may be obvious to many people, knowing how mortgage amortization works is important for your financial acumen. Let’s take a closer look at how amortization works.

What is Mortgage Amortization?

Mortgage amortization is fundamentally the practice of making planned, recurring payments over time to pay off your mortgage obligation. These payments, which include both principal and interest, lower the remainder of your mortgage until the loan is paid off in full.

How Does Mortgage Amortization Work?

The amortization of a mortgage normally follows a predetermined schedule, and if you have a fixed rate loan, your monthly payments are intended to stay the same for the duration of the loan. Although the total sum of the payment stays the same overtime, the portion of principal and interest in each payment changes.

Early Years of a Mortgage

In the first few years of your mortgage, a larger amount of your monthly payment is interest on the loan, while a smaller amount is used to reduce the principal. This is because your loan balance is still larger and interest is charged on the total of the principal balance remaining.

Middle Years of a Mortgage

As you make regular payments, your principal balance will decrease. As a result, the interest component of your monthly payment begins to decrease while the principal component increases. This change quickens the process of paying off your debt.

Later Years of a Mortgage

In the last years of your mortgage, the majority of your monthly payment is applied to the principal and only a small amount is used for interest. Your loan balance should be modest by now, and you're close to owning your home outright.

Why Does Mortgage Amortization Matter?

Knowing the breakdown of your monthly payments enables you to make wise financial decisions. As your mortgage remaining balance decreases and is close it being paid in full, you'll be ready for adjustments to your financial obligations.

Equity Building Through Your Mortgage Payments

You gradually increase your home's equity as you pay your mortgage. Your equity calculated by taking the estimated value of your house minus your remaining mortgage balance.

Refinancing and Prepayment on Your Mortgage

Understanding mortgage amortization can help you weigh the advantages and drawbacks of any decisions you make, including whether to refinance your mortgage to access your home equity or make additional principal payments.

Interest Costs of Your Mortgage

Understanding how interest builds up and is paid off over time can inspire you to investigate ways to lower your overall interest charges, including making extra payments or choosing a shorter loan term. On the flip side, if your interest rate is lower than the current market rate, you may want to deploy excess cash towards other investments instead of paying down low interest debt.

Knowing how mortgage amortization works is crucial for making wise financial decisions because it is an integral component of homeownership. The expert staff of loan officers at Standard Mortgage (NMLS#: 443912) are here to help you with all of your mortgage needs.