| Mortgage amortization is the act of repaying a loan | | | | monthly accounting period throughout the term of the |
| that has been granted for the express purpose of | | | | mortgage, with the interest payment slowly decreasing |
| purchasing a property. Actual amortization occurs | | | | as the principal payment increases. So on the 1st |
| through regular payments made over time. | | | | March the interest calculation would be: |
| How Does Mortgage Amortization Work? | | | | 0.005 x $199,800.88 = $999.01 |
| The accounting period for mortgage amortization | | | | The principal would be reduced by $200.09 (the |
| considers that there are 12 payment days in each | | | | remainder of the $1,199.12 payment after interest), |
| calendar year. These days fall on the 1st of each | | | | leaving the principal at $199,600.79. |
| month. The actual mortgage account commences on | | | | Penalties for Late Payments |
| the 1st day of the month that follows the day your | | | | Although most lenders will offer a "grace period" to |
| mortgage loan becomes active. The first payment you | | | | borrowers, whereby payments can be deferred from |
| make is known as "interim interest" and occurs | | | | the 1st of the month up to around the 15th, mortgage |
| between the period of the day your mortgage | | | | amortization payments that arrive after the 15th would |
| becomes active and the day your account begins. | | | | normally be subject to a late payment charge of up to |
| Subsequent repayments for your mortgage loan begin | | | | 5% of the normal monthly payment amount. |
| on the 1st day of the month that follows. So, if we | | | | Amortization and Overpayment |
| consider as an example that a 30 year mortgage of | | | | If you decide to overpay your agreed minimum |
| $200,000 at a 6% interest rate becomes active on | | | | amortization payment, you can effectively reduce the |
| 15th January, you will pay interim interest of $1199.12 for | | | | mortgage principal by the amount of the overpayment. |
| the period when your mortgage loan becomes active | | | | Using the above scenario as an example, if you were |
| (15th January - 1st February) with your first actual | | | | to pay $2,199.12 on the 1st March you would reduce |
| payment due on 1st March. | | | | the principal to $198,600.79. This enables more of the |
| Mortgage loan payments are split: part of your | | | | principal to be reduced in subsequent payments as the |
| payment goes towards interest on the mortgage loan | | | | ratio of interest payment to principal payment has |
| and part goes towards reducing the balance of the | | | | been dramatically changed. |
| loan itself. Interest payments are calculated through | | | | Tools to Help You Amortize Your Mortgage Loan |
| multiplying 1/12 of the rate of interest by the mortgage | | | | One of the best tools to use are mortgage |
| balance of the previous accounting period. So in our | | | | amortization schedules, which help you to see how the |
| example, 1/12 of 6% is 0.005. Consequently, the interest | | | | ratio of interest to principal payments change over |
| you would pay on March 1st would be: | | | | time. An amortization schedule can be quite nicely |
| 0.005 x $200,000 = $1,000 | | | | displayed through the use of spreadsheet templates |
| The remainder of the $1,199.12 ($199.12) goes towards | | | | that hold all the amortization formulas you need |
| the principal balance, reducing it to $199,800.88. Principal | | | | enabling you to make "what if" scenarios on the fly to |
| payments are a residual: i.e. the difference between | | | | see how that changes the picture of your mortgage |
| the total payment amount and the interest owing. The | | | | over time. Many websites offer free amortization |
| mortgage payment process continues for each | | | | spreadsheets with no strings attached. |