Amortization

Repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years)

Generally, payments made during the first five to seven years of a mortgage go largely towards interest. As the loan matures, a higher and higher proportion of each payment goes towards the principal loan balance. These payment schedules, or amortization tables, can easily be calculated by yourself using just about any spreadsheet program out on the market.

Procedure of reducing a loan in equal sized installments, with principal and interest payments, versus interest-only payments.

Amortization can also be considered negative amortization if the monthly installments do not cover the total amount of interest payable during the month.

Borrowers can make extra mortgage payments on their home loan to decrease the amortization term.

A 30 year mortgage will be listed with an amortization term of 30/30, or 360/360. A 20 year mortgage will have an amortization term of 20/20, or 240/240. Now, a balloon mortgage will have a payment that is amortized, generally over 30 years, but the loan will be due in x amount of years. An example of how this might be listed would be 360/180. This would mean that the payment will be amortized over 30 years, but however the loan is due in 15 years.

An amortization schedule will show you how much of each payment is going towards your mortgage interest and how much of your payment is going towards principle.

If you take your mortage payment (principle & interest only), divide it by 12 and apply that amount towards your principle each month, you will pay off a 30 year mortgage in approximately 22 years. ($1,200 Monthly principle & interest payment divided by 12 is $100. So you would pay an extra $100 per month).

» DISCLAIMER: The information contained in this article on 'Amortization' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.