Loan Amortization Defined
| Amortization is a term associated with mortgage loans | goes toward cutting down the actual loan amount. | |||
| and is mainly used in relation to loan repayments. | A mortgage is amortized when it is repaid with periodic | |||
| Technically defined, amortization is an accounting | payments over a defined term. The goal is for the | |||
| method in which expenses are accounted for over the | mortgage to be fully amortized, an elaborate way of | |||
| useful life of the asset rather than at the time they are | saying paid off, at the end of the term of the loan. | |||
| incurred. Amortization is similar to depreciation in that | As more and more of the principal is paid down, the | |||
| the value of the liability (or asset) is reduced over | interest declines, leading to greater mortgage | |||
| time. Simplified in terms of a mortgage, amortization | amortization in the later years of the loan and a | |||
| is a payment each month that combines both interest | subsequent increase in the borrower’s equity in the | |||
| and the principal amount and is paid over a specific | property. | |||
| period of time. The concept of amortization can | One thing to consider when taking out a mortgage is | |||
| seem complex and understanding the process is | the amount of money which will be paid out over the | |||
| essential to becoming an informed borrower. | life of the loan. A mortgage calculator which provides | |||
| The simplest way to explain the difference between | an estimate of monthly payments and amortizations | |||
| amortization and depreciation is understand the type of | can make it easier to see the entire schedule and | |||
| the financial events that they are associated with. | impact to the borrower. Negative amortization, which | |||
| Depreciation is a term used to define an asset (cash | can occur in financing instruments like a balloon loan, | |||
| or non-cash) that loses value over time. Mortgage | exists when the monthly mortgage payment is not big | |||
| amortization is the periodic reduction of the principal | enough to cover the full amount of interest due. | |||
| balance of a home mortgage that is usually fixed in the | The process of amortization is an easy one to | |||
| terms of the loan. | understand once you know the basics and get the | |||
| For the purposes of a home mortgage, amortization is | idea of how it all works. Mortgage amortization, as | |||
| the reduction of the principal or capital on a loan over a | used in real estate, is when the principal balance on a | |||
| specified time and at a specified interest rate. Interest | mortgage is reduced over time as the home owner | |||
| is the fee paid by the borrower to reimburse the | makes monthly payments. Amortization describes | |||
| lender for the use of credit or currency. At the | the process of paying off a loan in regular, typically | |||
| beginning of the amortization schedule a greater | monthly, installments. As a general rule, amortization is | |||
| amount of the payment is applied to interest, while | desirable, because if a mortgage is not amortizing, it | |||
| more money is applied to principal at the end. In other | means that the borrower is not making any headway | |||
| words, a borrower will start out paying mostly interest | on the loan. | |||
| and in the end the majority of the monthly payment |
Bill leverages his 18 years of experience in the financial services industry to write informative articles for the non-industry reader. His site can be found at www.hotmortgagedeal.com