How Mortgage Amortization Works
Mortgage amortization is the process of eliminating your mortgage debt with regular, fixed schedule payments that gradually chip away at both the interest and principal balance over time. But how exactly does mortgage amortization work?
The Mortgage Amortization Process
To understand how mortgage amortization works, you must first know the difference between paying interest and paying off your loan’s principal balance. A monthly mortgage payment will cover a percentage of both your interest and principal. The interest rate of a mortgage is the fee lenders charge you to take out a loan. Interest is added on top of the principal balance, or the amount that you initially borrowed.
At first, your mortgage payments will go mostly toward your interest and less toward your principal. However, as your loan balance decreases over the months and years, the amount that a lender can charge for interest decreases as well, thus causing the portion of your payment going toward principal to increase. Eventually, toward the final years of your loan, your interest will be just a small part of your monthly payment, and you will notice your balance going down rapidly.
To figure out how much goes to each in a particular month, divide your interest rate by 12 (the number of payments you will make in a year). Then multiply that number by your current balance. For example, if your rate is 6%, divide .06 by 12, which equals .005. If the balance is $200,000, then $200,000 x .005 = $1,000.00. That is the amount of interest you will pay that month.
Why Is Mortgage Amortization Important?
Mortgage amortization is crucial because it helps you figure out several important aspects of your finances. Mortgage amortization allows you to:
- Factor how much of each payment goes toward interest and principal
- Know how much interest you’re paying
- Track your loan balance
- Calculate your home equity
By analyzing an amortization schedule, you can discover which mortgage payment strategy works best for you. Understanding your mortgage amortization also helps you plan for the future and take the quickest path toward debt-free home ownership.
Finance Your Home with Butler Mortgage
To navigate the mortgage process, partner with the experts at Butler mortgage. We’ve served first-time and seasoned buyers for three decades in Florida and are excited to now bring our loan solution services to Georgia as well. To secure the best rate that fits your budget, call us at 407-931-3800 or fill out our free online consultation form.