Amortization: Why it’s so important
Most mortgages are structured so that you pay the same amount each month and the principal and interest of your loan are distributed differently as time goes one.
Amortization is the process of paying off a debt through consistent and equal payments. Each month, your payment is used to pay some of the principal and some of the interest. When making payments on a mortgage loan, the amount you pay at the beginning of the loan goes largely toward your interest and only a small portion is used to pay down the principal. This balance slowly shifts throughout the life of the loan, paying more toward principal and less toward interest with each payment.
An amortization schedule shows you in detail how much money you pay in principal and interest over time, and ultimately the repayment of your loan.
Amortization schedules clarify how much of each periodic payment consists of interest versus principal. This can be useful for purposes such as deducting interest payments for tax purposes. Amortization schedules are generated with the help of an amortization calculator.
Calculate your amortization schedule by visiting our calculator.
How amortization is calculated
The interest due each month is calculated by dividing your interest rate by 12 and then multiplying it by your current loan balance. The principal amount is then added to your monthly payments. Servicers recalculate this amount in order to make sure that your loan is paid off by the end of your term and as these amounts are recalculated on a monthly basis, your mortgage balance gets smaller and smaller.
How this can save you money
By making extra payments on your mortgage that are specifically directed to be put toward the principal, you'll pay less interest over the life of the loan and pay off your mortgage quicker. Even a small additional principal payment can save you money down the road.
It's important to ask your servicer if they have prepayment penalties when you are starting to think about paying off your loan before maturity. Prepayment penalties are fees that are charged if you pay off your loan too early. While Homepoint does not originate any loans with prepayment penalties, there are some lenders who do.
Understanding amortization and how your mortgage payment is calculated including the changes of principal and interest over time is crucial. This knowledge can help you save money by paying off your loan early, or making extra payments to your principal.
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