Amortization

Amortization is the process by which your monthly mortgage payment is determined In an Amortized loan you make periodic or monthly payments.

In amortized loans the amount of the payment is determined by the size of the principal on the loan, the type of loan, the interest rate on the loan, and the number of payments you are too make.

If you have a Fixed Rate Mortgage your payments will be the same over the life of the loan. While if you have an Adjustable Rate Mortgage (ARM) your monthly payments will change with the change in interest rates.

How is your mortgage payment calcualted?

When you take out a mortgage the total amount of money that you borrow is called the principle. This is usually the price of the house minus the down payment. Interest is the amount of money that the bank or lender charges you for the loan. Interest is a percentage of the principle.

In an amortized loan your mortgage payment is the principle divided by the number of payments plus the interest.

Your amortized monthly payment will first go to paying part of the interest on the loan and then it will go to paying part of the principle. In the beginning of the loan the majority of your loan payment will go to the paying of interest. This will change over the life of the loan. By the time you are half way through the loan your mortgage payment will go equally to interest and principal with each month after having a larger part of the payment going towards the principle.

Negative amortization

Negative amortization occurs when payments do not cover the cost of interest. The unpaid amount is added back to the loan, where it generates even more interest debt. If this continues you could make many payments, but still owe more than you did at the beginning of the loan.

© 2007 Scottie Watts