Florida Real Estate Blog

You may be ready to buy a home. You know that you need a low interest rate on the home loan. You know you need a down payment. You even know what to expect when it comes to the monthly payment. But have you taken the time to consider what amortization is? Mortgage loan amortization is simply a term that discusses how much of the loan you are going to pay in principal (the amount you actually borrowed) compared to interest ( the fee for doing that borrowing.) It is important to understand what this means before you buy a home.

Your Monthly Payment

When you work with your mortgage lender, he or she will likely talk to you closely about your monthly payment. He or she will break down the amount you'll pay each month. However, you'll also want to see how the payment breaks down. How much is being paid towards interest each month? How much is going towards the principal?

What many people don't realize is that only a very small portion of their initial mortgage payments will be used to pay down the principal on the loan. Rather, most of your monthly payment will be used to pay towards interest initially. As the loan term goes on, you'll pay less interest and more towards the principal. Why does this matter?

The longer the principal remains, the more interest will be applied to it. This is where amortization is so important. In short, you want to pay down the mortgage principal as quickly as possible to reduce how much you'll pay in interest on the loan.

Let's say you borrowed $165,000 for 30 years and paid 7 percent in interest annually. This is a monthly payment of $1097.  Your first payment will include $135 paid towards the principal and $962 paid towards the interest. At the end of 30 years, you'll have paid $230,189 in interest payments alone. That does not include the original $165,000 you borrowed.

To reduce the amount you'll pay, take the shortest term possible, find the lowest interest rate mortgage available, and pay more towards the principal each month if you can do so. You'll want to work with a reputable mortgage lender to help you to find an affordable loan. And, when you do, get an amortization table to see what you are really paying.

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