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With a fixed rate mortgage, you know your monthly payments will stay the same for as long as you have the loan. but, first time home buyeryou may not know that those payments change over time.
At the beginning of your mortgage, most of your monthly payments go to interest payments. Eventually, you start paying off more and more principal.
This is called mortgage amortization and knowing if your goal is to be debt free is an important concept. How mortgage amortization works and how you can use this knowledge Here’s what to do:
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Mortgage amortization is the process of paying off a mortgage. When you first take out a mortgage, you get a fixed monthly payment. A portion of this payment is interest, or money you pay mortgage lender instead of giving you a loan. Another part of the payment is major, or the amount actually borrowed.In most cases, part of your monthly payment will also go towards: property tax and insurance.
At the beginning of the loan term, most of the payment goes towards interest on the loan. This is because the loan balance is still high and you have to pay a large amount of interest. Only a small amount is passed on to the principal.
However, this gradually changes the longer the loan lasts. Repaying the principal also reduces the amount of interest you have to pay. By the end of the term, in most cases principal will be paid and a small amount of interest will accrue.
A mortgage amortization schedule is a graph or table that shows how payments change over time. For each month of the life of the loan, you’ll see an entry showing how much of the mortgage payment is the principal and how much the interest is.
For a $200,000 loan paid over 30 years at a 6% interest rate, the mortgage amortization schedule would follow this pattern:
month 1 (first month)
- Payment: $1,199.10
- Principal: $199.10
- Interest: $1,000
- Final Balance: $199,801
3rd month (3rd month)
- Payment: $1,199.10
- Principal: $201.10
- Interest: $998
- Final balance: $199,400
Month 360 (last month)
- Payment: $1,199.10
- Principal: $1,193.13
- Interest: $5.97
- Final balance: $0
After completing the mortgage process, you should review the mortgage amortization schedule. This is to understand how the mortgage will be repaid.
Mortgage amortization is determined by the loan balance, the length of the loan term, and your interest rate.
Luckily, you don’t have to do the math yourself. There are many mortgage amortization calculators available online that you can use to determine your payment breakdown.you can try this is from freddie mac let’s start.
What you can do with Credible compare prices, Research available home prices and generate streamlined pre-approval forms in minutes.
Mortgage depreciation has both good and bad sides.
- Your loan will be fully repaid with equal payments. With a fully amortized fixed rate mortgage, you can pay off your mortgage completely at the end of the term by making the same exact payment each month.
- We know all the payment details in advance. Mortgage amortization is a simple calculation.Amortization calculator helps you understand exactly how your payments are broken down before closing the loan.
- Your payment will not change. Traditional mortgage amortization allows you to keep the same monthly payments, making it easier to budget your spending.
- You build equity slowly. At the inception of the loan, very little of the principal has been paid. This means that you are only slowly building an equity in your home.
- It can be difficult to understand. Amortization is mathematics, but it is a complex calculation. Doing the math yourself is out of reach for most people.
- You pay a lot of interest. Over the course of a 30-year mortgage, you could pay hundreds of thousands of dollars in interest. The first interest payment on a mortgage is especially high due to the large balance.
If you can afford to pay off your mortgage sooner, it’s often a great idea. The sooner you pay off your loan, the less interest you will end up paying. Consider some of these strategies to save money and get out of debt faster.
- make an extra payment. When you make additional payments on your loan, the additional amount is usually applied directly to your principal balance. This reduces the amount you pay in total interest, often by a significant amount. You may be able to save tens of thousands of dollars on your mortgage by making small additional payments each month or year.
- Make biweekly payments. Instead of making monthly payments, consider making mortgage payments every two weeks instead. This could be commensurate with your salary. Throughout the year, you will pay the equivalent of 13 months of payments. That extra month can go to your principal.
- Refinancing to a shorter term. The shorter the mortgage, the less interest you’ll pay in the long run, but the higher your monthly payments. If your budget allows, consider refinancing your 30-year mortgage with a 15- or 10-year loan to reduce the amount you end up paying. Low interest rates may be available.
When you’re ready to apply for your mortgage, you can use Credible to: Compare interest rates from multiple lenders.