Loan Amortization Defined [mortgage-interestrates.blogspot.com]
myexcelcharts.blogspot.com How to create an amortization table that also let you calculate pre-payment amounts
mortgage-interestrates.blogspot.com Create an Amortization Table
Amortization is a term associated with mortgage loans and is mainly used in relation to loan repayments. Technically defined, amortization is an accounting method in which expenses are accounted for over the useful life of the asset rather than at the time they are incurred. Amortization is similar to depreciation in that the value of the liability (or asset) is reduced over time.
Simplified in terms of a mortgage, amortization is a payment each month that combines both interest and the principal amount and is paid over a specific period of time. The concept of amortization can seem complex and understanding the process is essential to becoming an informed borrower.
The simplest way to explain the difference between amortization and depreciation is understand the type of the financial events that they are associated with. Depreciation is a term used to define an asset (cash or non-cash) that loses value over time.
Mortgage amortization is the periodic reduction of the principal balance of a home mortgage that is usually fixed in the terms of the loan.For the purposes of a home mortgage, amortization is the reduction of the principal or capital on a loan over a specified time and at a specified interest rate. Interest is the fee paid by the borrower to reimburse the lender for the use of credit or currency. At the beginning of the amortization schedule a greater amount of the payment is applied to interest, while more money is applied to principal at the end. In other words, a borrower will start out paying mostly interest and in the end the majority of the monthly payment goes toward cutting down the actual loan amount.
A mortgage is amortized when it is repaid with periodic payments over a defined term.
The goal is for the mortgage to be fully amortized, an elaborate way of saying paid off, at the end of the term of the loan. As more and more of the principal is paid down, the interest declines, leading to greater mortgage amortization in the later years of the loan and a subsequent increase in the borrower's equity in the property.One thing to consider when taking out a mortgage is the amount of money which will be paid out over the life of the loan. A mortgage calculator which provides an estimate of monthly payments and amortizations can make it easier to see the entire schedule and impact to the borrower. Negative amortization, which can occur in financing instruments like a balloon loan, exists when the monthly mortgage payment is not big enough to cover the full amount of interest due.
The process of amortization is an easy one to understand once you know the basics and get the idea of how it all works. Mortgage amortization, as used in real estate, is when the principal balance on a mortgage is reduced over time as the home owner makes monthly payments. Amortization describes the process of paying off a loan in regular, typically monthly, installments. As a general rule, amortization is desirable, because if a mortgage is not amortizing, it means that the borrower is not making any headway on the loan.
Recommend Loan Amortization Defined IssuesQuestion by john h: 30 YEAR FIXED RATE MORTGAGE PAYMENTS - PREPAYING PRINCIPAL AND IT'S IMPACT ON AMORTIZATION SCHEDULE? If I have a $ 300,000, 5% fixed rate, 30 year mortgage, $ 1,650/ mth and pay an additional $ 500/mth specifically to be applied to principal, is the mortgage company's amortization table recalculated every month? In effect, is the monthly interest expense lowered not simply because interest expense lowers each month in a fixed loan, but also because of the monthly $ 500 payments designated to principal? My mortgage broker indicated that although my principal will be reduced with prepayments, my monthly interest and principal ratios won't vary from the original amortization schedule since prepayments will be applied on the back end of the loan (i.e. 360th installment payment) versus on the front end of the loan (i.e 1st payment)? Is this correct? Also, are their effective ways to "self audit" my mortgage payments to ensure they are being applied correctly? Thank you. Best answer for 30 YEAR FIXED RATE MORTGAGE PAYMENTS - PREPAYING PRINCIPAL AND IT'S IMPACT ON AMORTIZATION SCHEDULE?:
Answer by golferwhoworks
you loan officer is correct. the only way to make sure they are being 100% applied to principal is in a separate check monthly marked to principal only. Now no way to self check but you can get a pay off statement from time to time to audit the lender if you wish. Remember that your monthly statement is not a pay off as you are always 1 month behind on interest and then there are release of lien fees $ 12 and re-conveyance fees etc in a pay off statement
Answer by David W
If you have a simple interest loan (and you almost certainly do) yes, the extra money you are designating for principal will accelerate the payoff of your mortgage (effect the amortization schedule) and reduce the amount of interest you pay over the life of the loan. There is an easy way to verify. If you have a 30 year fixed rate loan on a $ 300,000 loan, your monthly principal and interest payment should be $ 1,603.78 (not sure what the additiona l $ 46.22 amount in your payment is for). If you get a monthly statement from your lender, take the principal amount on the statement and multiply it by .004167 (this is the monthly interest rate). Take the answer and subtract it from the monthly P&I amount. That will tell you how much of your payment is being applied to principal. If your loan balance goes down by only this amount then the extra $ 500 is not going to principal. If your loan balance goes down by this amount PLUS $ 500 it is being correctly applied. If your overal loan balance is lower (because of the $ 500 payment) you will owe less interest the next month. If you add $ 500 to every payment you will pay off the loan in 216 months (instead of 360) and your total interest will be $ 154, 416.48 (instead of $ 277,360.80).
