You’ve finally bought your dream home and have started making payments to your lender. Now you may be wondering, where exactly do your payments go? That’s where mortgage amortization comes in.
An important part of having a mortgage is understanding when your mortgage amortizes — this is when you go from paying towards your mortgage’s interest to mostly paying down the principal amount of debt. If you’re looking to save money on your mortgage amortization, there are a few ways to see if you’re eligible to reduce the amortization window.
What is a mortgage amortization?
Mortgage amortization is when you pay-off of your mortgage using a schedule and set monthly payments. These fixed monthly payments remain the same throughout your loan, whether that’s 15 or 30 years, and do not change over time — unless you choose to pay more than your monthly payment. This allows for predictability as you pay your loan over time.
Before we go into exactly how a mortgage amortizes, here are some helpful terms to know:
- Interest: Interest is the percentage a lender charges on the amount you’ve borrowed.
- Principal: Principal is the actual amount of money you’ve borrowed from your lender.
What does mortgage amortization do for homeowners?
Mortgage amortization gives homeowners a predictable schedule to follow while paying off their mortgage. Homeowners have money going towards both their interest and principal each month on this set schedule for the life of their loan to eliminate outstanding debt and increase their home equity value.
How does a mortgage amortization schedule work?
At the beginning of your loan, you’ll likely be paying more towards interest than principal. As your interest depletes, you’ll start paying more towards your principal and earn more and more home equity later in your loan. But every month your payment will still look the same.
So, let’s say you pay $500 a month towards your mortgage. In the beginning, $400 would go to your interest and $100 towards your principal. Down the line, it will slowly flip to $100 towards interest and $400 towards your principal. You build equity faster further into your loan because you start making bigger payments towards your principal.
How do you calculate your mortgage amortization?
If you want to figure out how much interest you owe on your loan and see how your mortgage amortizes over time, the following steps will give you an idea of how to plan out your payments.
Let’s say you have a 15-year mortgage loan for $350,000 at 3.1 percent interest. Your monthly payment is around $1,265. Using this example, here’s how to …….