When I was a kid, I was so bent on learning all of the really important stuff one learns in first grade that I never learned how to tie my shoes. I’m sure I was taught once, thought it was too difficult to understand and moved on to something else. Before I knew it, I was in fourth grade and the other kids were noticing I had been wearing Velcro shoes my whole life. The point of this embarrassing anecdote is that important things can be overlooked when you’re busy looking at the big picture. Such is the case with this week’s Know Your Mortgage, as we examine a simple concept that has been overlooked in the series: Amortization.
What Is Amortization?
Amortization is a scheduled payment of your loan over time, and the payments are made to the remaining interest and principal left on your home loan.
What Is Interest?
A summary on that is probably in order, because it’s only been briefly covered here before. Interest is what you’re charged by your lender for getting a mortgage. The amount you’re being charged (owed interest) depends on the size of the loan and what your interest rate is. If you can lock in low interest rates, like the rates we’ve been seeing for the past few months, you will owe less money over the life of the loan.
What Is Principal?
Principal is the amount of the loan you borrowed from the lender, or if you’ve already been making payments on your loan, it’s the amount you still owe. This is where amortization comes into play: you need to make payments on interest and principal during the life of your loan, and amortization manages these payments. Ideally, you’ll want to pay more on your interest at the beginning of a loan’s life because your principal amount isn’t going anywhere. Towards the end of the loan’s life, more of the payment will be directed towards principal to pay off the remaining amount owed.
Amortization will help you manage these payments every month so it’s a no brainer when starting a new home loan. There are plenty of calculators online that can help you calculate and manage your monthly payments, and Quicken Loans has an incredibly easy-to-use amortization calculator (Android & iOS) that’s completely free.
So there you have it, the convenient management of amortization has been bestowed upon you. No more acting like you know what it is, like me with shoelaces for a regrettable period of my life. If you have any lingering questions regarding the topic, please comment below.
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