What Does "Amortization" Mean In Real Estate?
Amortization is the schedule of your monthly mortgage loan payments. (Some other loans, such as credit cards, also use an amortization schedule to show the breakdown of payments.) An amortization schedule shows you how much of your monthly mortgage payment goes to interest and how much to principal.
When you decide to make a purchase of a home, more than likely you will obtain a mortgage loan. When you get the loan, you will see that in the beginning when you start to make payments, most of your monthly payment will be applied to the interest and a small portion to the principal balance.
As you continue to make your payments, the interest amount will decrease and more of the payment will be put towards the mortgage balance. The interest amount decreases after many payments because the interest amount is calculated and figured off of what is left on the balance of the principal amount instead of the entire original loan amount. The lower the principal, the lower the interest on the principal.
If you are trying to calculate the monthly amounts, you will find that it can be quite confusing unless you are a financial expert. Many mortgage lender websites offer an online mortgage calculator, which can show you the breakdown of payments over the life of the mortgage loan.
An example of how a mortgage payment is applied is as follows. If you have a loan for $100,000, and your interest rate is 6 percent, only a few dollars of your first payment will be paid toward the principal balance of your loan -- the rest will be interest. The second payment you make will be the same. It will be figured on the total amount of the loan minus the few dollars deducted from the principal balance your first month.
After a few months, you will see the amount of interest decrease, and more of your payments will go toward the principal balance.
When you have a schedule directly in front of you, amortization becomes because you will see the decrease in the interest payments and the increase in the principal balance payments every month.
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