With a regular home loan, during the early years of your mortgage nearly all of your payment will be applied to satisfy your interest responsibility and only a low amount will be applied to the principal balance of your loan. However, as your principal balance gradually reduces over time, a smaller portion of your payment will pay to the interest and the rest will be applied to the principal of your loan. The process of paying off a loan through specifically structured periodic payments is known as “amortization”.
An “amortization schedule” for your mortgage will show the amount of your loan’s principal, the total of your monthly payment, the amount of interest that will be collected periodically, how much will be used to reduce the principal, how many scheduled payments you must make in order to pay off your home loan…
With the conventional Fixed Rate loans, the principal balance, the loan term and interest rate will be the most important elements in determining your monthly payment and how your mortgage loan will amortize. However, due to the full spectrum of home loan products, you should be aware that other factors greatly determine your repayment terms and how your loan will amortize. For example:
• Numerous banks put up “interest only” loans. With that kind of loan, your payment will cover only the interest that is due, and none of your payment will be given to principal. Consequently, the total principal amount of your loan will be at maturity date.
• Some banks provide “balloon” home loans. In this type of loan, the required periodic payment is based on an amortization schedule that expands beyond the maturity date of the loan.
• Lenders are allowed to exercise a variety of different ways to calculate the portion of the mortgage payment that goes toward paying the interest. In a an average conventional 15-year or 30- year fixed rate home loan, nearly all banks estimate interest on the assumption that every month has 30 days and that each year is 360 days long. In other home loans, lenders also set the real number of days the principal amount is outstanding for each period and compute the interest due based on a 360-day, a 365-day, or a 365/366-day year. Even though most banks charge periodic interest in arrears, some charge interest up front. The interest computing method used by your banks will also impact the way your loan amortizes. It is best if you could ask your lender about the interest computing method that will be used on your mortgage.
• Be cautious of “negative amortization” loans. In this type of loan, the monthly payments required by your loan written documents are inadequate to pay the interest as it accrues on your loan. Consequently, your loan amount will actually increase, regardless of that you made the required payments on time.
Some banks offer “reverse annuity” or “graduated payment” home loans. These are special-purpose loans projected to satisfy the special needs of a small segment of homeowners. These are complex loans that usually require negative amortization and/or raising payment amounts. These types of mortgagee loans may require borrowers to pay additional interest on outstanding interest – as interest accrues, the lender may be granted to bring it to the outstanding principal amount of the loan.
Amortization is quite a complicated matter. Many people would never be able to compute the amount of interest and the amount that applies to the principal each month. Thankfully, you can easily locate a loan amortization table calculator on the net. You can use them to compute your periodic payment prior to making your decision which loan to take. Your lender will also provide you much more information when you ask for your mortgage amortization schedule.
Here is a free Loan Amortization Table calculator.