If you are considering buying a house, you will have to figure out, first, how much you can spend? If you are not buying the house straight out with cash, then you will need to seek a mortgage. Most mortgages are amortized loans, meaning they are made up of payments that go toward reducing the principal as well as paying off interest. Read below for more information on amortized loans-the most popular variety of mortgages these days.
- What is amortization? Amortization is paying off a predetermined amount (principal) plus interest over a fixed period of time. At the end of the term, the balance is completely eradicated. Mortgage payments are a typical example of amortized loans.
Characteristics of an amortized loan. Payments are the same amount each month and have a fixed interest rate attached to the payments. Payments will include some interest and some balance, but in a fluctuating ratio. In an amortized loan, it can take at least half the life of the loan (or more) for the interest and principal payment amounts to become equal. Eventually the amount of principal being paid off starts to outweigh the interest-at this point the balance starts to reduce visibly.
How to Calculate. Amortized payments are calculated by dividing the principal (the amount of loan) by the number of months allowed for the repayment. Interest is then added to the equation. Interest is calculated at the current rate as it pertains to the length of the loan (15, 20 or 30 years, for example). Each payment goes towards a fraction of the interest first, then a percentage of the principal.
Online Calculators. Computing your loan longhand can be complicating and time consuming. You cannot use a simple calculator for the computation; however, there are programs online that can do the work with a click of the button. For an online amortization calculator, see Mortgage-calc.com.
Mortgage Broker. Even if you access a calculator online, you will want to speak to your mortgage broker about the particulars of amortization. She will be able to develop an "amortized" chart for you to view. The chart your lender provides is the best chart you should consider when it comes to your finances.
If you are looking to amortize a loan, you are likely just starting your mortgage application, or you are in the process of refinancing. In either scenario, make sure that you understand the implications of an amortized loan. It is a good idea to plan on making extra payments towards your principal in addition to your regular payments-this will help make your loan disappear quicker. Have your mortgage broker review your finances and help you decide whether an amortized loan is the best option for you. Good luck!