Along with endless acronyms and percentage rates, there are certain confusing words that go along with the home buying process. One of those words? Amortization. It may have several syllables but it’s actually really straightforward. Simply put, amortization is the repayment of your mortgage loan through regularly scheduled payments.
You can request an amortization schedule from your mortgage lender that maps out your loan payments each month until it’s paid off. When you agree to a fixed-rate, 30-year mortgage, the lender calculates each individual payment for the life of the loan, indicating the starting balance, interest rate, and the total number of payments.
This special schedule also provides other helpful information. For example, you can see how much interest you’re paying and how much of each payment is actually going towards your principal. It’s particularly interesting to watch the interest amount change compared with how much principal payments you’ve made over the life of the loan.
Well, an amortization schedule will show you in black and white that at the beginning of your mortgage, your payment is almost entirely interest. It’s not until the end that you see the bulk of your money going towards the principal. Hopefully what this amortization schedule can do is inspire you to make additional payments here and there– payments that go strictly to your principal.
This will pay down your loan faster, cut down the amount of interest you end up paying, and leave more money in your pocket. Win, win, win!