What is a Mortgage Amortization?
So, how do you choose a loan that works for you?
This ultimately depends on your own situation, personally and financially.
If you are wondering how much house you can afford, check out this article, here.
Before you start touring homes, it is important to figure out how much you can actually afford.
Now, how can you do that?
Well, there’s a way to financially calculate how much you will spend over the loan’s term. This process is known as mortgage amortization.
To understand how this process can be broken down, continue reading.
What is a mortgage amortization? How does it work?
An amortized loan is paying off a debt with a fixed repayment in regular installments over a period of time.
In most cases, the payment of the loan is broken down into multiple installments. These repayment installments are determined by an amortization schedule.
At the beginning of an amortized mortgage loan term, most of the monthly payments are directed towards interest (what your lender gets paid for the loan).
With each subsequent payment, a greater percentage of the payment goes toward the loan’s principal (the loan balance).
What is an amortization schedule?
The percentage of interest and principal in each payment is determined in an amortization schedule.
The amortization schedule indicates the specific amount put towards interest and the specific amount principal balance with each payment.
Amortization schedules run in chronological order. Meaning, first payments are assumed to take place of one full payment period after the loan was taken out, not the following day the loan was processed.
The last payment completely pays off the remainder of the loan. More often than not, the last payment is a different amount compared to earlier deductions.
Amortization schedules also keeps records of the interest paid to date, the principal paid to date and the remaining principal balance on each payment.
How are the principal and interest determined?
The interest is calculated based on the most recent ending balance of the loan. The interest portion of the loan payment decreases as payments are made.
This is because any payment in excess of the interest amount contributes to reducing the principal, and this reduces the balance in which interest is calculated.
As the interest portion of an amortization loan decreases, the principal portion of the payment increases.
How is everything calculated?
The current balance of the loan is multiplied by the interest rate attributable for the current period to find the interest for the period.
Annual interest rates may be divided by 12 to find a monthly rate.
The interest for the period represents the portion of the payment attributable to interest. Therefore, subtracting the interest for the period from the total monthly payments results in the dollar amount of principal paid in the period.
The amount of principal paid in the period is applied to the outstanding balance of the loan. Therefore, the current balance of the loan minus the amount of the principal paid in the period results in the new outstanding balance of the loan. This new outstanding balance is used to calculate the interest for the next period.
If you’re wondering how you can save some extra money when buying a home, check out this article, here.
What is an amortization chart?
An amortization chart is a visual explanation of periodic loan payments, typically for a mortgage loan.
It shows the amount of principal and the amount of interest of each payment until the loan is paid off at the end of its term.
The chart shows the amount of each regular installment, the exact date of the payment, amount of money put towards interest and the amount applied to the principal balance.
The terms ‘amortization chart’ and ‘amortization table’ are frequently interchanged, but bot define and refer to the same thing.
What is an amortization calculator?
An amortization calculator, also know as a loan schedule calculator, is used to accurately estimate monthly loan repayments.
Each installment is different due to the amount of interest paid, outstanding balance and paid principal. There is where an amortization calculator will be useful.
These calculators will be able to estimate each regular payment, which makes budgeting easier to plan.
For mortgage loan purposes, amortization calculators will need the following information from you: current loan amount, term (in years), interest rate percentage and the state you live in.
Amortization schedules fluctuate based on the state you live in, so if you’re interested in seeing which state offers the best rates, check out this website here:
Who should use an amortization calculator?
Anyone is allowed to use an amortization calculator.
Whether you are a first-time home buyer, potential homeowner or even need a loan for a personal reason, amortization calculators are extremely resourceful.
Amortization calculators can simplify your budget planning by calculating how much you still owe and determine the estimated amount of your regular payments.
If you are curious as to how much you owe or want to budget accordingly, amortization calculators can be a helpful financial tool.
What do these data entry fields mean?
The data entry fields are pretty straightforward, but here is a little more in-depth explanation if the following:
Loan amount refers to the amount of money you borrowed or wish to borrow in the near future for a mortgage, car or student loan.
Interest rate is the annual interest rate paid for the amount of money you borrowed. Interest rates are expressed in percentages (%).
Loan length is the time frame you have to make regular payments to the lender. Once you’ve reached the end of this period, the loan will be paid off completely.
Loan start day refers to the date when the loan was first approved. This does not mean this is the first day of your payment period. Depending on your payment schedule, the first payment is due on the next scheduled date. For example, if the loan was approved on 6/10/17, the first payment would be on 7/10/17.
What do these result fields mean?
The ending result can be confusing to some. So, here are the result fields broken down:
Period shows the ordinal of a specific payment in the amortization schedule. The total amount of periods can be calculated if you multiply the number of annual periods by the length in years. For example, if you are paid bi-weekly (26 paydays) over a 5-year timespan, the loan has 130 periods (26 paydays x 5 years = 130 periods).
Date shows the exact date of when the payment is due, according to the amortization table. Your lender will expect your payments on this date.
Interest paid shows the amount of regular payment that is applied towards interest. As the loan matures, the amount of interest paid decreases.
Principal paid shows the specific monetary amount put towards the outstanding balance. As the loan matures, the larger amount is put towards the outstanding principal balance.
Remaining balance, also known as outstanding principal balance, is the remaining amount of the loan you owe to your lender. Simply, it is the amount you have no paid yet. This amount can be calculated if your total principal is subtracted from the original loan amount.