If you have a mortgage (or are in the process of getting one), then you’ve probably heard the term “amortization” before.
Put simply, amortization is the act of spreading your loan balance out into equal payments over a set period. Each month, a portion of that payment will go to interest, and some will go toward whittling down your balance.
By the time your last payment is made, the loan will be fully paid off. Make sure you understand these key details about amortization and how it impacts a mortgage.
- Amortization is reserved for installment loans. That includes car loans, personal loans and mortgages. Interest-only loans, lines of credit (credit cards, HELOCs) and loans that allow for balloon payments are not amortized.
- More of your early payments will go toward interest. With amortized loans, a larger portion of your payment will go toward your interest in the beginning. But more will go toward the balance of your principal as you get further into your loan term.
- Amortized loans come with fixed payments. This means you’ll pay the same amount each month. But there is an exception to this: If your payment includes escrow costs, it may vary due to those costs rising or falling.
- You’ll have access to an amortization schedule. When you view your loan’s amortization schedule, it will show you how your payments break down. This can help you plan ahead as a homeowner.
To learn more about amortization or anything else related to home financing, get in touch today.