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Over time, the portion of your monthly mortgage payment that’s paid to principal and interest varies according to your amortization schedule. Understanding your amortization schedule can help you make informed decisions about how best to pay off your loan, and the length of time and cost it will take to do so.
What is mortgage amortization and how does amortization work?
Mortgage amortization describes the process in which a borrower makes installment payments to repay the balance of the loan over a set period of time. These payments are divided between principal, or the amount borrowed, and interest, or what the lender charges to borrow the funds. Lenders structure loans this way partly to lower their risk if the borrower were to stop making payments.
With a fixed-rate mortgage, the monthly payments remain the same throughout the loan’s term. However, each time you make a payment, the amount of your payment that goes to the principal differs from the amount that gets applied to interest, even though each payment is made in equal installments.
As your loan matures, you can expect a higher percentage of your payment to go toward the principal, with a lower percentage going toward the interest.
— Nishank KhannaChief Marketing Officer, Clarify Capital in New York City
The longer the amortization period, the lower your monthly payment. That’s because the longer you spread out your payments, the less it will cost you each month, simply because there’s more time to repay.
The downside to a longer loan term, however, is more money spent on interest. In addition, because the interest payments are frontloaded with a longer mortgage, it takes more time to really make a dent in the principal and build equity in your home — a factor to consider when comparing your loan options.
Negative amortization happens when the payments you’re making don’t cover the interest on the loan. This might be the case if your lender allows you to pay only some of the interest initially, for example. This means your balance grows instead of being paid down. Over time, if the amount you owe ends up exceeding the value of your home, you’ll be “underwater” on the property, making it more difficult to sell and use those proceeds to repay the mortgage. “@context”: “https://schema.org”,“@type”: “FAQPage”,“mainEntity”: [“@type”: “Question”,“name”: “How do you calculate amortization?”,“acceptedAnswer”: “@type”: “Answer”,“text”: “It’s best to use an amortization calculator to understand how your payments break down over the life of your mortgage. To use the calculator, enter your mortgage amount (principal), term (such as 30 years) and interest rate. The calculator will provide an in-depth schedule for each month of your loan with details such as how much principal and interest will be paid in any given payment and how much principal and interest have been paid by a specific date.”,“@type”: “Question”,“name”: “What is negative amortization?”,“acceptedAnswer”: “@type”: “Answer”,“text”: “Negative amortization happens when the payments you’re making don’t cover the interest on the loan. This might be the case if your lender allows you to pay only some of the interest initially, for example. This means your balance grows instead of being paid down. Over time, if the amount you owe ends up exceeding the value of your home, you’ll be “underwater” on the property, making it more difficult to sell and use those proceeds to repay the mortgage.”]
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