Do you ever wonder how your mortgage payments are broken down each month? There seems to be a lot that goes into a mortgage payment each month, and it is important to understand exactly where your money is going every month for so many years. This is where mortgage amortization comes into play. Mortgage amortization is the way your mortgage payments are distributed on a monthly basis. This in-depth look shows how much interest and principal will be paid off each month for the duration of the loan term. This schedule shows you just how much interest is being paid each month, as well as how much money is going straight to the principal amount of your mortgage loan. This will show you exactly how much you will be paying over the duration of paying back your mortgage. This can help you decide what type of mortgage term you want for your home, and which one will be best suited to your financial situation.
How much interest you pay on your mortgage will depend on what the current interest rate was when you purchased your home. Let’s say you have a mortgage of $100,000 at 6.5% for 30 years on a fixed rate mortgage. Your monthly payment would be $632.07. $541.67 of that number would go to interest that month, and $90.40 would go toward the principal. After this, you would now owe $99,909.60 on the mortgage because you took off $90.40 from the outstanding balance. So, the next month, you would owe the interest on the $99,909.60 instead of the full $100,000. Your interest paid will slowly go down along with the lowering outstanding balance of your mortgage, but the amount paid to principal will increase each year as the interest goes down. For example, in the last month of your mortgage, you will still pay the $632.07 monthly payment, but $628.66 would go to principal, while just $3.41 would go towards interest. This is because you have paid the mortgage down, lowering the amount of money that will be charged interest.
Now that we understand where your money is going each month, you have to decide which loan term you want. The amortization schedule will show exactly where your money is going each month based on the number of years you are paying back the mortgage, as explained above. If you have a longer term, you will be paying lower monthly payments, but you will end up paying more interest over time because the balance goes down slower. If you have a shorter amortization period, then you will pay less interest over time because you are paying off the loan more quickly, but your monthly payments will be higher.
You can look into different payments. If you do biweekly payments, the extra payment will go toward principal, which will lower the amount of interest paid and decreases the term of the loan. You can also do what are called accelerated payments any time of the year when you are financially capable, and make the term shorter, as well as lessen the amount of interest you have to pay on the mortgage.
Knowing where your money is going each month when you write the check to pay for your mortgage is important. This way, you can decide which term is right for your financial situation. Although it can be very confusing, your mortgage lender will work with you to ensure you understand where your money is going, and why your payments are played out the way they are.