How To Understand Your Mortgage Amortization Schedule
An amortization schedule contains details of each periodic payment to be made on a loan (they are normally associated with mortgages) and is generated by an amortization calculator.
With any sort of loan, a portion of every payment will be applied towards both the interest and the principal balance of the loan. The exact amount applied to the principal each time will vary and the remainder goes towards paying the interest.
In an amortization schedule it shows the specific amount that will be put towards the interest as well as the specific amount to be put towards the principal balance from each payment. In the beginning you will find that a large portion of each payment to be made will be devoted to the interest of the loan and then as it matures larger portions of these payments will go towards paying down the principal.
All amortization schedules run in chronological order and the first payment will assume to take place one full payment period after the loan was first taken out (not on the actual first day of the loan). As for the last payment this will then completely pay off the remainder of the loan and often this amount will be slightly different from all the earlier payments.
As well as breaking down each payment into interest and principal portions an amortization schedule will show the interest paid to date, the principal paid to date and the remaining principal balance on each payment date due.
However there are a few crucial points that should be noted when mortgaging your home using an amortization loan.
1. There is substantial disparity between allocation of the monthly payments toward the interest in the first 18 years. Normally the first payment will allocate 90% of this payment towards the interest and only 10% of it toward the principal balance. It is only in later years will the payment allocation between the principal and interest even out and then subsequently tip the majority toward the principal balance.
2. Understanding the amortization schedule can be difficult for the borrower and they may find themselves paying over 300% of the value of the original loan amount.
Unfortunately this fact is often overlooked by the borrower and never seems to be addressed by the mortgage professional who is advising them.
3. The payments on an amortized mortgage loan remain the same for the entire term of the loan no matter what the principal balance owed is. Many people who wish to avoid the high costs related to an amortized mortgage loan, will instead choose an interest only loan in order to satisfy their mortgage financing needs.
So when looking at a amortization mortgage loan is it important that you check through the amortization schedule before signing anything.
Related Tags: mortgages, mortgage loans, amortization schedule
Jim Olio has further related mortgage information on his website at Amortization Schedule
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