If you are a homeowner who has just started paying off your very first home loan, you’re essentially amortizing your home loan. Mortgage amortization is the process of reducing debt by making payments regularly according to a predetermined schedule. Understanding how this process works is very crucial to your budget.
How Exactly Does Mortgage Amortization Work?
To better understand how amortizing a mortgage works, you first need to know the difference between paying off the principal balance of a mortgage and paying off interest. Your principal is the amount you borrowed from your mortgage lender, meaning that if your mortgage amount is $300,000, that’s your principal balance.
Your interest, on the other hand, is the fee that your mortgage lender would charge you for letting you borrow money. But since your lender would charge you interest, the exact amount you would owe for purchasing your house would become higher than the $300,000 you initially took out for buying your home, explains VIP Mortgage, a renowned lender in Tempe.
With mortgage amortization, you’d be paying off your loan, plus interest. Your first payments would go towards paying off interest charges instead of your principal balance until such time that your amortization schedule is almost over.
As a borrower, your primary goal is to send payments on time, every month so that your balance would become lower and lower until it reaches 0%. With every payment you make, you inherently increase the ownership percentage of your home and build equity in your home.
The percentage that goes towards your principal and interest from your monthly payments is not random since lenders have a set amortization formula for that. You could use online amortization calculators to determine this amount and make your own mortgage amortization chart. This way, you’d likewise have a clearer idea of when your mortgage would fully amortize.
The Bottom Line
Mortgage amortization is paying off your home loan over a predetermined amount of time. This is done through scheduled, most often, monthly payments. Knowing this process is very vital when you’re looking to determine how much you could comfortably afford your monthly mortgage payments.