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4 Helpful Tips on Mortgage Amortization

4 Helpful Tips on Mortgage AmortizationThe path to homeownership generally requires the prospective homebuyer to take out a loan. The great majority of these loans fall into the category of amortized mortgages. It means that a mortgage amortization schedule controls the distribution of both principal and interest payments each month. That distribution should be clearly outlined in the closing paperwork given by the lender.

Since the mortgage process is confusing and uses old English verbiage such as “amortization”, we are here to provide a few easy tips for the recent homebuyer. We’ve pulled together four helpful tips that might help shed some light on the process of mortgage amortization for the confused homeowner.

1. Stick to Your Mortgage Amortization Schedule

The mortgage amortization schedule is a meticulously designed mathematical plan for mortgage repayment.

Starting with larger chunks going toward interest and smaller amounts going toward principal, the interest to principal ratio slowly shifts over the course of repayment.

Stick to Your Mortgage Amortization ScheduleMany assume that they can start paying down the principal right away, but that’s usually not the case. At first, you’ll probably pay a lot more in interest than in principal. This leaves first time homebuyers scratching their heads halfway through repayment because the amount of principal left to pay is still considerably more than half.

Some lenders may allow early repayment, which if started early in the loan could save the homeowner a plenty of money that would have been spent on interest. Homeowners who pay off principal early may get hit with a pre-payment fee so it is critical to read the closing documents provided with the mortgage agreement. Lenders can charge 1% to 3% each time a homeowner pays above the requested amount.

If pre-payment is allowed, notate that your additional check should go toward the principal, not interest. If that delineation is not made then it might be that a lender will apply the additional payment toward interest only.

We’ve included the first seven years of a sample mortgage amortization schedule of a $500,000 mortgage over 30 years with a 4% interest rate and a monthly payment of $2,387.08:

Year

Payment Total

Interest Total

You Own

Balance

1

$28,644.92

$19.839.74

$8,805.18

$491,194.82

2

$57.289.84

$39.320.73

$17,969.10

$482,030.90

3

$85,934.75

$58,428.38

$27,506.37

$462,567.79

4

$114,579.67

$77,147.46

$37,432.21

$452,237.57

5

$143,224.59

$95,462.15

$47,762.43

$452,237.57

6

$171,869.51

$113,355.97

$58,513.53

$441,486.47

7

$200,514.42

$130,811.78

$69,702.65

$430,297.35

Calculation provided by 1728.org/mortpmts.htm

Notice the interest payment starts proportionally decreasing over time. This means each payment begins to slant more toward principal during the entire repayment period of your mortgage.

2. Never Miss a Mortgage Payment

AAmortizing the mortgage sets a schedule for payment in full, and you’ll do yourself a favor if you never miss a monthly payment. Missing a mortgage payment may cost you additional fees and penalties.

If you want to pre-pay any amount of your loan, consider saving that payment for a time in the future where you may be strapped for cash and would otherwise miss a payment. The reality is that the banks won’t pat you on the back if you decide to re-pay a full amount of loan.

Creating a savings buffer may be the name of the game for some. Smooth repayment can help keep stress down over the many years of repayment.

Confusion concerning mortgage amortization is not uncommon. Many new homeowners have trouble understanding the ratio between interest and principal of an amortized mortgage repayment as well as the how the principal gets paid down over many years.

YouTube user MathDoctorBob comes to the rescue and helps explain the often confusing process of loan amortization in an easy to understand way:

3. Refinance only when the time is right

A standard mortgage amortization schedule front loads the interest payments on a mortgage. Refinancing your mortgage might have the potential to reset that amortization schedule. This means a mortgage that continues to get consistently paid back for many years and is near completion is not a strong candidate for refinancing as you may find yourself back to paying primarily interest. This would halt equity accrual and may lengthen the time it takes to fully own your home.

Refinance only when the time is rightRefinance only when the time is rightSometimes it’s a good idea to refinance, especially if you can lock into a fixed rate mortgage. It means restarting the amortization schedule – you’ll start paying more interest and less principal again. But you won’t have to be concerned about fluctuating mortgage rates, and that can be a smart decision for homeowners looking to control monthly expenses.

If you have a possibility we recommend you to pay off a mortgage that is nearing completion because you’ll probably be paying all principal and it will provide you with greater equity in your home.

Equity is a great thing to accrue. It is the dollar amount of value in your home that you’ve paid back and therefore own. Equity unlocks the true value of your home and provides you with a few options even while you’re paying back your mortgage.

4. HELOCs and how they affect Mortgage Amortization

Speaking of equity, HELOCs and home lines of credit help tap into the accrued equity built into your home purchase. Home owners could use that money for any number of things. However, extracting that equity into liquidity then puts the homeowner back on the hook for additional repayment.

While a HELOC functions more like a revolving line of credit, many have considered these loans to be a second mortgage. Considering a usual HELOC has a 25 year term, it’s easy to see the similarities.

Mortgage Amortization Takeaway

Since every homeowner and his situation is different, it is essential to devise a plan that fits you, understand the working principal of amortization, and the nuances of your specific mortgage amortization schedule. Some lenders allow pre-payment, some penalize for additional mortgage payments. HELOCs might be an answer to some homeowner’s in a money pinch, but others may find the terms restricting in the long run. For this reason, it is important to check with your lender if those specific terms are not explicitly outlined in your mortgage’s closing paperwork.