There are numerous financial decisions you must make with any mortgage company Dallas when purchasing a house or residential property for yourself. When talking about home loans or mortgages, you must be familiar with mortgage amortization. If not, then this article is for you.
We’re going to tell you all you need to know about mortgage amortization, and how it works for home loans in Texas.
What is Mortgage Amortization?
Mortgage amortization is a common technique used to lower down the book value of a home loan. When we talk about home loans, mortgage amortizations work by spreading out loan payments over a period of time. This is basically a decrease in your debts, with the help of regular monthly payments of the decided rate of interest as well as the principal amount.
It is important to know that your monthly mortgage payments will be constant and equal. This does not include all your taxes or the cost of insurance for your mortgage. But, you must also know that the total amount of principal and rate of interest could change each month.
Therefore, this is basically how your loan payments will be applied to your home loan. In most cases, your monthly loan payments remain constant. But, your monthly payments will be divided by the amount of interest rate of that loan.
This in turn reduces your loan balance. Mortgage amortization is a good way of learning how your home loan actually works. Also, you can easily predict your current outstanding balance, as well as the interest rate that you will have to payout.
How does mortgage amortization work?
The easiest and most understandable way of knowing how basic mortgage amortization works is to review an amortization table. When you’ve applied for a home loan or mortgage for your home, then you definitely must have an amortization table with you.
An amortization table shows how your mortgage payments are distributed over specific periods of time, and how much interest rate and principal will be paid off at the end of each month. If you take a look at an amortization table, you’ll notice your monthly loan payments for each month. This will also include your rate of interest, as well as the principal amount.
In almost every amortization table you come across, there will be scheduled payments, principal repayment, and interest expenses.
Your scheduled payments
You scheduled payments are going to list all the monthly payments of your home loan or mortgage that have to be paid at the end of each month.
Your principal repayment will include the remaining amount of payment that will go for paying off your debt. Lastly, your interest expense will include the total amount of rate of interest you have to pay to your loan or mortgage lender for providing you with that loan.
Your interest expense can easily be calculated by multiplying your loan balance at the end with your monthly rate of interest. It is important to know that in the amortization table, your total payments for each month will remain constant. However, your loan’s interest rate and principal amount will be different for each month.
Now, if we talk about mortgage amortization for your home loan, those are usually 15-year or 30-year fixed-rate mortgages. Now, this depends on the type of mortgage you’re going for, whether they are fixed mortgages or adjustable-rate mortgages (ARMs).
If you choose the latter, your mortgage lender will adjust the rate of interest on a predetermined schedule. This can have a huge impact on your amortization table.
Let’s look at this example to understand better. Let’s suppose you have a mortgage of $100,000. This includes a rate of interest of 4.5%, which is to be amortized in 30 years. Your principal and interest for each month would be $507 in this case.
First Monthly Payment
When you make the first monthly payment for your mortgage, you will have to pay $375 for the rate of interest, and $132 for the amount of principal.
Then, if we fast forward to half of your home loan, for let’s suppose the 15th year. You will need to pay off $249 for the rate of interest, and $257 for the principal. For the last year, which is year 30, $2 will be paid for the rate of interest, while $505 will be paid for the principal amount.
Therefore, mortgage amortization is an ideal way of learning how borrowing and lending works. As well as evaluating different home loan options for you.
Homeowners can also make important key decisions based on monthly payments each month. Moreover, with a mortgage amortization table, you can easily compare mortgage lenders. Choose a 15 or 30-year loan easily, and also decide if you want to refinance your existing loan.