Mortgage Calculator Fundamentals: Understanding Amortization

Amortization is the monthly repayment of principal and interest payments that are made on a loan throughout the loan term.  A fully amortizing loan would have payments of principal and interest that bring the loan balance down to zero by the end of the term.  Mortgage calculators can produce an amortization schedule that demonstrates how payments of principle and interest are applied to a mortgage loan.  The mortgage calculator amortization schedule will show specifically how much of each payment is applied to the principal and interest each month or year or any period in between.

Homeowners are frequently taken aback to see that very little of their payments are applied to principle, the amount borrowed excluding interest, each month during the first years of monthly mortgage payments.  In the beginning years of a 30 year mortgage, most of the monthly payment goes towards the interest payment and very little is actually applied towards the principal balance.  It’s possible to save thousands of dollars over time by prepaying on a mortgage with slighter higher monthly payments or an extra payment per year.   There are numerous options to pay off a mortgage loan early and the amortization schedule of the mortgage calculator can help enormously.  Another option is to select a mortgage with a shorter term or if a borrower already has a mortgage to refinance into a mortgage with a shorter term.

A borrower who is considering getting a new mortgage or refinancing, mortgage calculator with amortization tools incorporated with the mortgage calculator can aid in comparing mortgage products.  The user can estimate payment amounts and remaining principle balance after each payment is applied.  An amortization calculator can help you understand how each installment of principle and interest is applied first to the interest owed and then the outstanding loan balance.  This can help a borrower see how adjustable rates, negative amortization, and interest only payments compare to a traditional fixed rate mortgage with full amortization.  Additionally, an amortization schedule is useful if you’re choosing among mortgage loans with different terms.

Taking hold of the loan numbers with a mortgage calculator and amortization schedule can help a borrower find the best loan to purchase a new home or refinance an existing mortgage.

This entry was posted on Friday, December 12th, 2008 at 1:57 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.