An amortization schedule is a table that lists each monthly payment that you’ll make on your mortgage, and how much each payment will be allocated to your lender’s interest and toward your principal balance. With a fixed-rate mortgage, you have peace of mind knowing that your principal and interest portions of your monthly payment will remain the same across the life of the loan. However, the amount of principal and interest in each payment is allocated differently as your loan gets older. In the beginning of your loan, you pay more interest than towards the end of the life of your loan.
How Does an Amortization Schedule Affect Your Mortgage?
At the beginning of your loan, most of your payment will be allocated toward the interest that you owe. However, as you make several years of payments, the allocation will begin to shift towards reducing the principal balance of the mortgage. By studying your specific amortization table you will know what your balance will be at the beginning of each month, as well as what remains after each payment.
Understanding how an amortization schedule works can save you a lot of money. When you look closely at your schedule you can see how making additional payments toward your principal can reduce how much you pay in interest over the life of your loan. When you reduce how much you pay in interest you can pay down your principal more quickly, ultimately reducing the time and cost of your mortgage.
How Do Mortgage Lenders Calculate How Much You Owe?
After your mortgage lender collects all of your financial information like bank statements, credit score, assets, etc. they are able to determine the interest rate of your loan. Once the final amount of your mortgage is established they can calculate your monthly payment and populate the amortization table for your loan.
In order to determine the amount of interest you’ll pay each month, your lender will take the total amount of the loan and multiply it by the interest rate on the loan. This number is divided by 12 to get your monthly interest payment. Subtract the interest payment from your total payment to find out the that will be applied towards principal. For month two, you do the same thing except you start with the remaining principal balance from month one.
Understanding amortization is very important to effectively and successfully manage your mortgage. Finding the right mortgage lender is also a critical step in the home buying or refinancing process. For over 90 years the experts at Standard Mortgage (NMLS#44912) have been helping people find the best solutions for their mortgage needs.