Monday, 9 March 2020

When you get a fixed-rate mortgage loan to buy a home, you probably know you'll be required to make a monthly payment for 30 years, or 15 years, or whatever term you and your lender have agreed to.

But you may not realize exactly how that monthly payment will pay off your home loan over time, including interest to your lender.

This process of spreading out a loan into a series of payments is called amortization. While the amount you pay each month remains the same, the way the payment is divided shifts incrementally over time, starting with more of the payment going to interest and gradually moving toward more going to your principal, or loan amount.

When you understand how a mortgage amortization schedule works, you'll have a better idea of how much you're actually paying for your home over time.

How to use a mortgage amortization schedule

When you study the tables in an amortization schedule, you can develop a greater understanding of the true cost of your mortgage debt. If you'd like to reduce the amount of interest you'll be paying over the life of your loan, you can make extra payments toward the principal of your mortgage.

When you've paid extra principal, your loan amount will be reduced. That will affect the amortization calculation for the following months, allowing you to pay less interest in future months.

How amortization is calculated

The amount of interest you pay each month is based on the fixed interest rate you agreed to when you took out the mortgage loan, the amount you still owe on the loan and the length of time remaining on the loan. When the amount you owe on the loan decreases, so does the amount you're paying in interest.

During the early years of your mortgage, the majority of your payment is attributed to interest. Over time, more of your payment is applied to the principal of your loan.

For help determining how your mortgage loan will be amortized, you can use an online mortgage amortization calculator. When you enter the term (number of years) of your loan, the amount you're borrowing and the interest rate, an amortization calculator will do the math for you and show you how your payments will be divvied up each month over time. 

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