When you make monthly mortgage payments, a portion of that money goes toward the loan principal, and a portion is applied to the interest. Amortization is all about understanding the relationship between the principal and the interest, and how this relationship changes over the life of the loan.
For some of us, math can be hard. Once variables get thrown into the mix it can seem chaotic. Most people aren’t aware that your mortgage (a large math equation in it’s own right) can be figured out using many different helpful calculators. Read more, as they’re the topic of this week’s Know Your Mortgage.
This week in Know Your Mortgage, we examine a very basic yet vital part of getting your mortgage paid off: Amortization. It’s a big word with a simple concept, and we’ll help break it down for you.
What if I told you that adding some extra cash to each monthly payment could potentially shave months off of your term and save you thousands in interest a month? What if I told you that you could see just exactly how much you could save over the life of your loan with one simple calculator?
Fixed-rate mortgages – also called conventional mortgages – have been the most popular home loans for decades. The interest rate on a fixed-rate mortgage stays the same throughout the life of the loan, as opposed to adjustable rate mortgages (ARMs), in which the interest rate may adjust or “float.” Fixed-rate mortgages allow for repayment of a debt in equal monthly mortgage payments over a specified period of time, called an amortization period. At the end of the amortization period, which can last anywhere from 10 to 50 years, the loan will be paid in full. Because a 30-year amortization period is the most common, the 30-year fixed-rate mortgage has become the industry standard in the United States. For the first few years of a 30-year mortgage, most of your monthly payment goes toward interest, but toward the end of the loan period, much of your monthly payment goes toward principal. What Determines 30-Year Fixed Mortgage Rates? Interest rates on 30-year fixed mortgages are driven by 1-year, 5-year, and 10-year Treasury Note yields, which are auctioned to the highest bidder. At the end of the note’s term, the U.S. Government pays back full face value to the bidder, so in effect, bidders are loaning the bid amount to the U.S. Government. In return, they get the interest rate and the full face value on the note. As a result, the interest rate on a 30-year fixed mortgage is usually just slightly higher than that of the 30-year Treasury Bond at the time…
It’s a question that comes up again and again: How much will I save if I pay off my loan early? Take a look at these examples to see what makes sense for you.