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Understanding Amortization

 

What You'll Learn

  • The amortization schedule outlines every monthly payment and the amount that goes toward principal and interest
  • Your contributions to principal start out low and increase as the loan matures

After you complete your loan application, you can request the amortization schedule for your new home from your lender. This is an important table that details the amount of principal and interest paid each month, ultimately providing you with the true cost of your home over the life of the loan.

Example:
You bought your home for $150,000 with a down payment of 10%, resulting in a loan amount of $135,000. You secured a 30-year fixed-rate mortgage at 4.5% interest with a monthly mortgage payment of $684.03.

Following are highlights from the full amortization schedule on your loan.

  Date  Int­erest  Prin­cipal   Bal­ance
Month 1 $506.25 $177.78 $134,822.22
Month 24 $490.27 $193.76 $130,544.24
Month 48 $472.06 $211.97 $125,669.68
Month 72 $452.13 $231.89 $120,336.96
Month 96 $430.34 $253.69 $114,503.01
Month 180 $335.31 $348.72 $89,067.12
Month 360 $2.56 $681.47 $0
Assuming that you stayed in your home for 30 years, you would pay over $246,249 in principal and interest over the life of the loan. To illustrate the power of interest rates, on this same loan with a 7% interest rate, you would pay $323,337 in principal and interest.

As you can see, in the beginning years of homeownership, the largest portion of your payment is applied to interest versus principal and you’re building equity at a slower pace. As the loan progresses, you see more of your payment applied to your principal, paying down your balance at a faster pace.

 

Key Takeaways

  1. At the beginning of your loan, a greater portion of your monthly payment is applied toward interest

  2. As the loan matures, the interest versus principal allocations will even out, ultimately reversing

  3. The amortization schedule allows you to see the real cost of the home after all interest is paid

 

Tip

Did You Know making extra mortgage or principal payments will save you in total interest paid over the life of the loan and will help you pay your loan off more quickly?

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