Mortgage Amortization

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Mortgage Amortization

Anna J Crosby
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What Is Mortgage Amortization?

Amortization leads to the process of paying off a debt (often from a loan or mortgage) over time during regular payments. A part of each payment is for interest while the outstanding amount is applied towards the principal balance.

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Mortgage amortization is whereby a home loan is paid down: The debt wanes slowly at the beginning and then rapidly toward the end. At first, most of the individual mortgage payment goes toward interest. In succeeding years, most of the payment reduces debt. The gradual shift from paying mostly interest to mostly debt payment is mortgage amortization at practice.

Using a mortgage amortization calculator, you can:

  • Find out how much total interest you would pay across the life of a loan.
  • Figure out how much of each month's payment goes toward principal (debt reduction) and interest.
  • Compare the total cost of a 30-year loan versus a mortgage with a shorter term, such as 15 years.
  • Determine the remaining loan balance in any given month.
  • Know when you're approaching 20% equity, so you can cancel private mortgage insurance.

"Amortization" is pronounced am-ur-ti-ZAY-shun. "Amortize" is pronounced AM-ur-ties.

When loan officers speak about amortization, they frequently mean the loan's term or the number of years it will take to pay it in full. A "30-year amortization" and a "30-year mortgage term" imply the same thing.

Mortgage amortization definition

Amortization is a repayment characteristic of loans with equal monthly payments and a fixed end date. Mortgages are amortized and thus are auto loans.

Monthly mortgage payments are equivalent (excluding taxes and insurance), but the amounts going to principal and interest varies every month.

Take the example of a $100,000 mortgage with an interest rate of 4.5%, amortized over 30 years. Monthly principal and interest would total $507:

  • With the first payment, $375 would go via interest and $132 would go to principal.
  • Halfway through the loan term, at the end of the 15th year, $249 would go toward interest and $257 would go to principal.
  • With the last payment, $2 would go toward interest and $505 would go to principal.

How does mortgage amortization work?

Amortization is the process of scattering out a loan (such as a home loan or auto loans) into a series of fixed payments. A mortgage amortization table also called a mortgage amortization schedule, is the simplest way to visualize the concept.

The mortgage amortization table is a grid that displays the amount of each payment that goes toward principal and interest.

"An amortization table displays the amount of each payment that goes toward principal and interest."

This excerpt of a mortgage amortization schedule shows what happens with the first payments on that 30-year mortgage for $100,000 with a 4.5% interest rate.

In addition to detailing how much of each payment goes to principal and interest, it presents the remaining balance after each payment. With this loan, the balance is $99,202 after six payments.

How can you calculate your mortgage amortization?

Amortization is most easily calculated with an amortization calculator or pre-built amortization schedule because the calculations change after each payment. There are several online tools available, including free calculators from financial institutions and the Government of Canada.

Here are a couple you may find useful:

This site offers several types of calculators, including an amortization calculator showing the difference monthly or bi-weekly payments will have on the amortization period.

  • Calculator.net

This site offers a mortgage calculator and creates an amortization table that shows how much of your payment is applied to principal and interest each month.

What does amortization mean in a mortgage?

An amortized mortgage implies that the loan balance decreases gradually at first. That means your payments build equity gradually in the first years of the mortgage. The good news is that you build equity more swiftly in the final years of the mortgage.

To accountants and business owners, "amortization" has other meanings, too. But for homeowners, mortgage amortization indicates the monthly payments pay down the debt predictably over time.

What is the longest amortization period allowed on a Canadian mortgage?

If mortgage insurance is required, the longest amortization period that can be requested is 25 years. Without this insurance, 30-year amortization is possible.

Can you extend the mortgage amortization period if necessary?

The amortization time can be extended, but this is handled as a new application and you will have to qualify for the mortgage all over again. Now, an extra risk factor exists – needing a longer amortization to lessen payments.

You presumably have other questions about choosing the best mortgage terms for you. Your mortgage broker is a great resource to answer any questions you might have about your particular situation.

If you have more questions about mortgage terms and amortization, a mortgage broker is forever an excellent source of information and can help with your specific needs.

Do I want a longer or shorter amortization period?

The answer depends on your financial condition. A shorter amortization has higher mortgage payments, but over the long term, you save thousands of dollars in interest. If you need the lower payments now, exert a longer amortization and be sure you have the option to make extra payments later to decrease the amortization period.

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