Most of us are
familiar with car loans, and other types of loans that have a short repayment period of 3-5
years. When it comes to a mortgage loan however, the
amortization period is much longer as it can reach up to 30 years! For people who are not familiar with how a mortgage loan works, let's go
over what amortization means and how it functions on a mortgage loan monthly payment.
Amortization is the calculation that
is used to calculate the amount of interest and principle that is paid during the life of a loan
period. With each mortgage payment that is made, a portion of your
payment is applied to interest and principle, thus reducing your mortgage amount month to month. Amortization is simply the process of figuring out the amount of money that
will go to both interest and principle during the life of the loan.
Why is amortization so
important because it helps a person know how much money they will be paying each month for the next 30 years in
many cases. The amortization schedule will show a person how much
money they will have paid when all is said and done once the mortgage is paid off. In most cases, people pay 3 to 5 times as much as the house is worth once a
mortgage has been paid off, so having an amortization schedule is a great way to keep the lender and rates that
you are considering in check.
Amortization is directly affected by
the interest rate of the loan you have. When getting a mortgage refinance, or if you are looking to fix your
bad credit mortgage with mortgage refinancing, the interest rate should be your primary
concern. The lower the interest rate is, the lower payment you will have to make when all is said and done.
Instead of paying 4 times more than the house is worth, you may only pay 2 to 3 times what it is worth if you
get a low enough interest rate. This is why doing your research when getting a mortgage refinance or new
loan is so important. By securing a lower interest rate, you can keep more of your hard earned money and still
get the house that you have always wanted.
can see, amortization plays a huge role in the loan process and is very important to understand. Most lenders give a Good Faith Estimate, which will have the amortization
table on the form for you to easily see how much you will pay over the life of the loan.