Mortgage Amortization Explained
Put simply, amortization is the process by which you pay back a debt through equal payments on a routine basis over a specific period of time, like 30 years. Every payment that you submit, usually on a monthly basis, is then divided up and put towards certain portions of your debt. In the case of most loan arrangements, part of your payment goes to the interest and the other part is applied to the principal.
At the start of your term, interest costs are high and a majority of your payment is going towards paying interest, while a smaller portion goes toward repayment of the principal balance. This is particularly true for any loan with a long term. While many mortgages can run as long as 30 years, you will most likely encounter this sort of arrangement.
But as time passes and you continue making your payments on time, a smaller portion of your payment is applied to the interest and a larger portion is applied to the principal.
So when your mortgage is amortized, it means that your payments are structured in such a way that by the full term of the loan your final payment is enough to pay of the remainder of your loan balance. For instance, if your mortgage has a 30 year term you will submit 360 equal monthly payments that will pay off the balance of your mortgage in full over the 30 year period.
How to Amortize your Mortgage
There are all kinds of online calculators and spreadsheets that you can find to help you determine the amortization on your mortgage. Go to www.milend.com and use our payment calculator. It is quick and easy to use and will help guide you on what payment amount you can expect on any loan amount and term.
Just think of it this way, every payment is based upon three factors: the term of the loan, the interest rate, and the amount you borrowed. They work in conjunction to decide how much of your payment goes to interest and how much goes to principal. So let’s say you have a 30-year fixed mortgage for $100,000 and an interest rate of 6%.
Take your starting balance of $100,000. Your monthly principal and interest payment over 30 years at a 6.0% fixed interest rate will be $599.55 per month. At 6% interest, that breaks down to an interest charge for the first month of $500.00. Simple multiply your balance of $100,000. X .06 = $6,000, and divide that by 12 (for 12 months) and you get $500 as your 1st interest payment. Subtract that from your payment of $599.55 and you’re left with $99.55, the amount applied to principle. Subtract the $99.55 from you loan balance of $100,000 and your balance is now reduced to $99,900.45
To calculate the 2nd months do the same calculations using the new balance of $99,900.45. With that same $599.55 principal and interest payment, the amount that goes towards interest would be $499.50 and the remainder of $100.48 is applied to the principal. The loan balance after your second month is $99,800.40. You subtract the $100.48 from your starting balance of $99,900.45. If you continue to make these same calculations for the 360 payments or until the end of your term, you’ll notice that the interest charge gets a little smaller with each monthly payment and more of the payment is applied to the principal until the final payment pays off the remaining balance in full.
Refinancing With MiLEND
For over two decades, the home loan experts at MiLEND have made it our #1 priority to serve clients like you with the utmost in professionalism, integrity, and customer service. Our licensed staff of qualified and experienced loan officers will help you navigate the waters of refinancing your mortgage to save you as much money as possible to maximize your financial opportunities. At MiLEND, refinancing is our specialty and we’re proud to offer not only a wide variety of loan options, but the ability to negotiate more favorable rates due to our high volume of processed loans, when compared to other lenders.
Contact MiLEND today to discuss if refinancing is right for you and your personal financial goals.