| Most of us have done it at a point or another during | | | | deducted and then followed by your loan. However, it |
| our lives however most of us do not know that the | | | | does not mean that the first payment is totally used to |
| term is called amortization. Amortization in its simplest | | | | pay interest but rather parts of it. |
| term means paying off your loan over a period of | | | | Taking our previous example, the monthly payment of |
| time. Amortization is pretty general and does not just | | | | $870.00. About $760 will be used to repay interest |
| relate to home loan or mortgages. It can be used to | | | | while the rest ($110.00) is used to pay off your principle |
| refer to your car loan, credit card bills etc. | | | | loan amount. For each subsequent monthly payment, |
| The process of amortization is usually determining how | | | | the amount of interest paid is reduced. Eventually after |
| much you need to pay for each payment over a set | | | | as you approached the 30-year period, your interest |
| period of times. It is usually calculated by the loan | | | | paid would be minimum while the majority of your |
| amount, the time period in which you have to pay | | | | monthly payment goes towards repaying the principal |
| back, the amount per payment and the interest rate. | | | | loan. |
| An example would illustrate the above point better. | | | | Quite clearly as you can see, for each new loan you |
| Take for example you brought a house for $150,000, | | | | take out, the early monthly payments will be used to |
| you pay a deposit of $20,000. So you are left with a | | | | pay off the interest with only a small portion towards |
| home loan of $130,000. Suppose you found a lender | | | | repaying your loan. |
| who is willing to give you the loan that is for a period | | | | As you can see, amortization is quite a complicated |
| of 30 years with an annual interest rate of 7% | | | | matter. Most people would never be able to calculate |
| So how much would be your monthly payment? | | | | the amount of interest and the amount that goes into |
| First we divide the principle loan amount which is | | | | repaying the principal loan per month. Thankfully, there |
| $130,000 with the time period in months. That would be | | | | are many free amortization calculators available on the |
| 30 times 12 equals 360 months. You also need to | | | | internet. You can use them to calculate your monthly |
| factor in the interest rate of 7%. When you add up, the | | | | payment before deciding which loan to take. Your |
| monthly payment would be around $870.00. | | | | lender will also provide you with these information |
| Besides calculating the monthly payments, for | | | | when you take a amortization loan. |
| amortization loans, the interest payment is first | | | | |