Have you ever had a loan, like a business loan, a salary loan, a personal loan, or a mortgage? If so, then you should also know about amortization. If you have applied for your first mortgage, it is hugely important that you learn about amortization schedule for mortgages. This is what will tell you what you will pay, towards what, and when. While it may sound confusing it is actually reasonably easy to understand, once you see past the financial jargon.
Some Tips on What to Learn About Amortization Schedule for Mortgages:
Very simply put, an amortization schedule is a matrix that describes or details when and how payments are made towards a loan, using the computation that takes into account the schedule of payments and the interest rate. An amortization computation scheme is generated by a computer system that the bank uses. To break through that piece of jargon, what you need to know is that the amortization schedule basically is a breakdown of what you will pay the bank that issued your mortgage, and how much of that they will keep (the interest is their profit, after all), and how much of it will go towards you paying back what they borrowed you.
Every loan, regardless of type, is made up of the amount you actually borrowed and the amount you pay in interest. This is put together in a monthly payment. In an ideal situation, what you pay every month is more than the monthly interest, so that the principal amount also starts to get paid little by little. If you don't do this, then your loan might mature with you having the full principal to pay. If, however, you pay a little bit more than the monthly interest, your principal will decrease, which means your interest payments will decrease as well, since that is calculated as a percentage of the principal.
When you learn about amortization schedule for mortgages, you will see that there is a specific order for the payments you make. This order is a mathematical calculation, that is perhaps best expressed as follows:
Month 1: ((Principal loan amount) x (interest rate)) – (monthly payment) = amount to be deducted from principal.
Month 2: (((principal loan amount) – (amount to be deducted from principal) x (interest rate)) – (monthly payment) = amount to be deducted from principal.
Month 3: (((remainder principal loan amount) – (amount to be deducted from principal) x (interest rate)) – (monthly payment) = amount to be deducted from principal.
Unless you are pretty good at math, this may have actually confused you more. So, let's simplify it with actual figures, taking a $100,000 mortgage with a 3% interest rate, and a $5,000 monthly payment. In that case:
Month 1: ($100,000 x 3%) – $5,000 = $2,000
Month 2: (($100,000 – $2,000) x 3%) – $5,000 = $2,060
Month 3: (($98,000 – $2,060) x 3%) – $5,000 = $2,121.80
As you can see, the remaining principal loan amount is reduced every month, and the amount to be deducted from the principal increases every month, because the 3% interest payment equates to a smaller amount each time.