The majority of today’s lenders will provide their borrowers with an amortization schedule to clearly identify what will be expected of them. However, amortization schedules are also very important tools for borrowers to use on their behalf. With the proper mortgage amortization to reference, even before receiving a loan, borrowers can identify exactly what they can afford prior to making any commitments.
An amortization schedule is a visual representation of what a borrower can expect to pay each and every month for the duration of their loan. In divulging each periodic loan payment, a proper amortization schedule will identify exactly how much of each payment is to be allocated to the principal and interest. Also included in the amortization schedule are line items meant to identify how much the borrower has paid in interest and principal for the entire loan term. In other words, an amortization schedule breaks down each and every aspect of what a borrower has already paid and what they can expect to pay in the future.
While each amortization schedule is dependent on the loan originator, the majority of amortization schedules will have the borrower pay down interest first. Periodic payments will remain the same for the first portion of the loan, but the majority of each payment will be dedicated to paying off the interest. As the years progress, and the interest gets paid down, the majority of each payment will be allocated to the principal, until the loan is paid off in its entirety.
Let’s say you want to take out a 30-year fixed-rate loan for $300,000 with an interest rate of 5.25%. Under those conditions, the first three months of your amortization schedule would look something like this:
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This is merely an amortization schedule example, and in no way representative of what yours may look like should you choose to take out a loan. The concept will be the same, but the numbers will certainly reflect your personal situation. For a better idea of what you should expect to pay on your own mortgage, try using Amortization-Calc.com’s amortization schedule calculator. Once you know the type of loan you want, the interest rate you’ll receive and how much money you’ll borrow, creating your own mortgage amortization schedule will be as simple as plugging in a few variables.
Mortgage amortization is important because it identifies each and every payment made over the course of a loan, and how much of each payment is being distributed between principal and interest payments. If for nothing else, there are a lot of “moving parts” to a loan; this way, the borrower is made fully aware of their obligations, where the money is being allocated, and what to expect for the foreseeable future.
Amortization schedules have several practical applications, but none may be more important than estimating total mortgage costs. In breaking down each payment that will be expected of the borrower, prospective buyers should be able to determine whether or not they can afford the impending loan.
While not a feature of every loan, negative amortization may be used to “penalize” borrowers that don’t keep up with mortgage obligations. More specifically, however, any interest that isn’t accounted for in a payment will be added to the loan’s principal balance. The increase in the principal is intended to recoup any losses resulting from missed interest payments.
Amortization schedules play an important role in helping borrowers understand what’s expected of them. With a proper schedule, prospective buyers will not only know how much they owe at any given time, but also how each of their payments are being allocated to principal and interest obligations. In gaining the insight an amortization schedule can offer, there should be no reason a borrower can’t estimate their mortgage costs over the entire duration of the loan and—more importantly—budget accordingly.