Something you may come across in securing a mortgage is an amortization schedule or amortization table. It’s a long word for a complex document that can actually simplify the loan shopping experience.
Amortization is the process of paying off a debt over time in regularly scheduled installments made up of interest and principal. An amortization schedule is a detailed breakdown of your monthly loan payments and how those payments are divided between the interest and the principal. It can be a useful tool in comparing the interest you’ll pay with different loans and how different payment schedules can alter your bottom line.
Loan amortization breaks the loan balance into a schedule of equal payments based on the loan amount, term and interest rate. With an amortization schedule, you can see how much interest and principal you will pay with each monthly installment as well as your outstanding balance after making each payment.
While your mortgage payments stay the same each month, the percentage going to interest versus principal changes with every payment. For the first several years, you’ll be paying more towards interest and less on the principal. But, after each payment, your interest is recalculated based on the new, now lower, loan balance. As the principal shrinks, the amount of interest due each month also drops, and more of each monthly payment goes toward paying off the principal.
While loan amortization determines your minimum monthly payment, it does not prevent you from making additional or higher payments. Any amount you pay above and beyond the minimum monthly payment will go toward paying down the loan principal, allowing you to build equity more quickly.
Amortization schedules are also useful for:
- Comparing the total interest you’ll pay on different loans with different terms or interest rates
- Calculating how much interest you can save by paying more than the minimum each month
- Reverse engineering your loan payment to determine how much you can afford to borrow
- Calculating your annual interest paid to claim on your taxes
Your USA Mortgage banker can walk you through amortization schedules for the loans you are considering. As always, we’re here to help you get the very best mortgage for your budget and lifestyle.