How Amortization Impacts Your Fixed-Rate Loan
Amortization is an important term in real estate lending, but one that is not well understood outside of people working in the industry.
This concept has an impact on payments for fixed-rate loans, but not specifically on how much you pay. Instead, this term has to do with what your payment goes to.
Sound confusing? Let us explain…
Amortization is simply the process of paying off a loan over time with equal payments at a given period, which is usually monthly. As each month comes and goes, the payments are exactly the same, down to the very penny. However, what makes up the payment will change.
Each monthly payment, starting from the beginning, is made up of two parts: balance and interest. In other words, there is a portion that goes to reducing your loan balance, and a portion that goes to your interest costs.
At the beginning of the loan, the interest costs are highest. This is especially true for long-term loans, such as 30-year mortgage loans. With this loans, a large portion of the loan goes to interest expenses, and you only pay a small fraction towards the balance of the loan. You don’t make much progress on the debt total because most of the money is going to interest, but you are making progress.
As time goes by and you continue to make payments, more of each monthly bill will go towards the loan total and less will be needed to pay off interest.
These types of loans are designed to completely pay off the loan total by a certain date, and your last payment will completely pay off the remaining amount.
The benefit of amortization is that your payments never change, so you are always paying the exact same amount, regardless of how much is on the balance and how much goes to interest.
The longer your amortization period, the lower your monthly payments will be, while shorter periods bring higher payments because the loan is being crammed into a smaller timeframe.
It’s important to remember that a shorter amortization schedule will save you money in the long run because you are paying less interest over the total life of the loan. If you have a shorter amortization period, such as 15 years instead of 30, you will save a considerable amount because the loan has less interest added to the loan. (Interest rates on shorter loans will often be lower.) However, the monthly payments, regardless of interest, will be higher with a 15-year mortgage.
When working with a lender, you may want to request an amortization schedule in addition to the “payment schedule.” A payment schedule is a simple breakdown of when your payments are due; they don’t provide the deeper information on balance and interest that you get from an amortization schedule.
If you are knowledgable about amortization schedules, you may want to make added payments on your loan to reduce the total amount of interest that you pay. There is nothing wrong with this strategy, but you should be sure that your loan does not have any prepayment penalties, which can disrupt your plan.
Using Our Amortization Schedule
Our amortization schedule calculator is a simple and convenient way for you to gain information on your mortgage. Here is a basic guide to how it works…
This is not exactly the full property value, but the amount of money you will be borrowing from the bank. For example, if you are purchasing a $500,000 home, but have a $50,000 down payment, you can simply enter $450,000 into the Home Price amount. This amount is also the total balance that will be progressively reduced as you make payments. Whatever amount you are borrowing from the bank, enter that amount into this field.
Mortgage Term in Years
Next, you can enter the mortgage term in years. Mortgages can be created to virtually any number of years, (within reason, of course) but the most common terms are either 15 or 30 years. As we discussed above, a 30 year mortgage will have smaller payments but will cost more in the long run, while 15-year mortgages have larger payments but cost less overall. It’s also possible to get extremely short 10-year mortgage loans or lengthy 40-year mortgages.
Mortgage Term in Months
With our mortgage calculator, you also have the option of entering the amount of months. This field is directly connected to the years, so if you enter 30 years into the field above, 360 will automatically enter the “Mortgage Term in Months” field. (30 years = 360 months.) If you enter 240 into the months areas, 20 years will be automatically entered into the years. This field is helpful because it also tells you how many total payment you will need to make. (Assuming monthly payments.)
The final variable that you can enter is your interest rate. Understanding the specific amount of interest you will pay can be difficult, however, so speak with a mortgage professional to get an idea of what your interest rates will be. While there are common indexes for interest rates, this number will be affected by your credit situation, the type of loan you choose, and other factors.
Add Extra Payments
The final factor to enter, which is actually an optional feature, is to enter any extra payments. This feature helps you estimate the effects of any added payment that you make towards the loan. For example, if you expect to add an extra $1,000 every January, you can enter this amount into your loan calculation.
Get Expert Guidance on Your Mortgage Loan
You can work with an expert team to get the right loan for your specific situation. Contact us today and we’ll help you understand how amortization affects your loan payments.
With a common-sense approach to mortgage approval, we are your ally for affordable terms!