Amortization: How to compute mortgages, car loans, leases, investments & more.
Mortgage payments made by borrowers to their lenders (i.e. banks, financial institutions etc.) are split into two parts: principal payments and interest payments. A section of the monthly mortgage payment therefore goes towards paying the lender's monthly interest fee, and the remainder goes towards amortization of the principal loan - in other words reduction of the original amount of money borrowed.
Mortgages are normally spread over a period of 15-30 years:
This is because the loans are generally for very large amounts of money, and the majority of each payment made over the early part of the term goes towards paying off the lender's interest, with only a small portion of it going towards amortization of the principal loan. Over the term of the mortgage, the amount that goes towards paying off interest reduces, and the amount that is put towards amortization of the principal loan increases. Therefore, towards the end of the loan you will find that the majority of each monthly payment is going towards reducing your principal loan balance, with only a small portion being out towards paying interest to your lender.
On the other hand, there is negative amortization. This method is used to reduce the mortgage payments at the beginning of the loan term, and can be used on both fixed-rate mortgages and adjustable rate mortgages. However, this means that during the later part of the payment term, monthly payments will have to be increased in order to amortize the original loan. The amount by which the payments will have to be increased later on is largely dependant upon the amount of negative amortization and the period over which it occurs.
Those thinking of taking out a mortgage are now able to generate an amortization schedule (monthly or yearly) as well as viewing monthly payment figures by using a mortgage calculator. This facility is available on the websites of many companies that specialize in mortgages and lending. By entering the relevant details, including the amount of money required (loan), and the term over which you wish to borrow it, you will be able to get an idea of what your monthly payments will be as well as the level at which the principal loan will be amortized.
Amortization means that the amount that you borrow is repaid gradually over a set termů
And via regular monthly payments comprising both interest and principal. The amortization term - the amount of time over which you will whittle down the balance of your loan to zero - depends upon the amount you wish or can afford to pay each month (normally 15-30 years). Although the ratios of your monthly payments will change from paying mainly interest during the earlier years to paying mainly principal during the latter years, the idea is that by the end of the loan period your total borrowing will be fully amortized.