February 19, 2019
Is Owning a Home a Good Financial Decision
Well, before you answer this question, there are some things you need to consider, and one of the major things is mortgage amortization
Mortgage amortization has a big impact on your personal finances, although it is not the best financial topic in the world. In this article, we will try to break it down to try understand what mortgage amortization is and why it is a factor you should consider when considering whether buying a house is a good financial decision or not.
Definition of mortgage amortization
When you pay your monthly mortgage, that money is split between paying interest and the other one goes towards settling the down principle that reduces your loan balance. Amortization is the process by which that split is calculated using a mortgage amortization calculator.
Mark you, the payment is not split the same way all through the life of your mortgage, each payment is different. Your earliest payments actually go towards settling the interest.
Say, for instance you buy a house worth $250,000, put 20% down for 30 years, $200,000 mortgage with 4% interest rate. This means that your monthly payment adds up to $955. To know the amount of first payment that will go towards interest, you divide the interest rate by 12 to get the monthly interest and multiply the result by your outstanding loan:
(4% / 12) * $200,000 = $667
This means that $667 of your mortgage payment goes towards paying off the interest, while the remaining $288 reduces your mortgage debt to $199,712.
Next month the amounts will reduce to $666 settling interest payment and $289 going towards your loan because of the lower mortgage balance.
You should get a loan amortization schedule calculator when you apply for a loan. This way you will know how much money goes towards your interest and how much goes to settle principal. You can also tell the total amount of interest you will pay over your loan lifespan.