Mortgage Application: Understanding Mortgage Amortization

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Understand Mortgage Amortization

A person must know numerous details about mortgage. Regardless whether they apply for conventional, VA, or FHA loan, some key terms must be known to ensure a buyer will know what mortgage offers. Knowing these terminologies will also prepare possible expenses that come along the way. One of these terminologies is mortgage amortization.

Mortgage amortization is a terminology that surprises every first time homebuyer. it’s best to know what it is now than get surprised later.

Definition

Mortgage amortization is not a scary terminology for first time buyers to know, although it can be quite intimidating. The term refers to the estimated debt reduction because of regular mortgage payments. Throughout the amortization period or loan maturity, a buyer needs to pay principal and interest fees.

Why Knowing About It Is Important?

Knowing mortgage amortization is crucial because it gives borrowers an idea about how mortgage works for them. Different loan types work differently in terms of mortgage amortization. It’s also crucial to know more about amortization because a buyer will know whether the amount paid in time will be more beneficial for them or not.

How It Affects Your Mortgage

Mortgage amortization will show a specific trend on how your mortgage payment will change in time. Depending on how long you’ve been paying your mortgage, the changes on your loan payments will show significant changes. For starters, you’ll pay the loan with lower principal or the actual payment needed to pay the loan. During this time, you’ll pay expensive interest rates. After several months or years, your principal will increase, but your interest will be lower than the first time.

During the first year, your principal payment will increase by up to $20 while the interest rate will be $20 lower than the first time you began paying for mortgage. As you can see, the savings you’ll get may not be as significant, but it gives you an opportunity to further lower down your interest rate while paying your mortgage term faster.

Once your interest rate decreased, you can use the savings to pay for higher principal. Taking the above example, the $20 savings from interest rates can be added to the principal on top of its inflated rate. This means additional $20 paid on your loan, further lowering your interest and even shortening mortgage term.

To have a better idea of mortgage amortization, you can use a mortgage calculator Arizona designed for computing amortization. Many of this calculator type is available online and can be useful for everyone getting a loan.

Methods in Shortening Amortization

Your goal in knowing amortization is knowing how much to pay in time and shortening amortization period. A shorter amortization period means faster time to gain lower interest rates. Luckily, several methods are effective in shortening amortization period.

One way is by paying higher principal consistently. So, if you’re paying $550 principal, paying $700 consistently or at least $600 can significantly shorten amortization period.

Paying biweekly mortgage payments also have the same effects. Rather than paying 13 mortgage payments for a year, you’ll pay 26 payments throughout the year. The extra payment will be paid towards the principal, which will lower interest and loan balance.

Just like in knowing mortgage amortization period, an amortization calculator will also be a great help in knowing which mortgage deal is better as well as the amount to pay monthly. Use various price combinations to know the amount that can shorten your mortgage term.

Once you have your eyes set on shortening mortgage term, you can do various things to have sufficient funds in paying your principal and loan. For example, sell some unused items at home or take some part-time jobs then use all your earnings from these strategies to pay your mortgage. This guarantees to shorten your mortgage term by up to four years, depending on the amount you allot as extra payment.

But throughout this strategy, be sure to invest on other future needs like retirement plans and others. Numerous people have been too obsessed in paying off their mortgage and forgetting about other needs that will lighten their future living.

Whether you’re using FHA mortgage loans or conventional loans to pay off your house, amortization is a term that you should know and understand. If you’re still confused, ask your lender or broker to get further explanation about this terminology.

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