What Exactly Does Amortization Mean?

A major portion of the mortgage process involves looking at purchase price, rates of interest and deposit amount. Together they help determine the mortgageloan, amount and how it will be funded, which can be translated into a schedule called amortization.

Fundamental Folder

Amortizing a debt method to reduce the balance by paying interest and principal on an established schedule. By making regular, scheduled payments on time, the mortgage or loan will be repaid by a maturity date.

Fixed-Rate Mortgages

By making regular payments toward a mortgage, you lower the equilibrium of the interest and principal. A fixed-rate mortgage completely amortizes at the end of the expression. In the case of a 15-year fixed-rate mortgage, the loan is paid in full at the end of 15 years. A 30-year fixed-rate mortgage is paid in full at the end of 30 years, if payments are made on schedule. Loans with briefer terms have significantly less interest since they amortize over a shorter period of time.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) also completely amortize, whatever the fluctuating interest rate. For example, a 15-year ARM will still be paid in full at the end of the 15-year term if payments have been made regularly, despite interest rates that may have risen and fallen during the life of the loan.

Calculating Amortization

You can compute a mortgage amortization schedule if you know a few important pieces of information: Regular interest rate and loan balance. Beginning with the first month, multiply the mortgage balance by the periodic interest rate. This will provide you with the first month’s interest payment. Subtract that interest payment from the entire payment to find out the principal amount. To figure the principal and interest payments for following months, subtract the first month’s payment from your mortgage balance, then replicate.

Interest

In the earlier portion of this amortization schedule, monthly obligations are composed primarily of interest. Since the schedule proceeds, more principal is paid from each monthly payment. A detailed amortization schedule from your lender will provide specific quantities of just how much of each monthly payment goes toward interest and toward principal.

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