What Is Amortization with a Mortgage?

Posted on: 4 May 2020

If you are working with a mortgage lender right now, it is probably because you want to buy a house and need a loan to close the deal. A mortgage loan is a specific type of product used for the purchase of a home. As you prepare for the loan, you should understand what amortization is with a mortgage. This term is a key concept you will hear your lender talk about, and it is helpful for you to understand what it means. Here are several things to understand about amortization.

The Definition

When you sign your closing documents for the loan, your lender will include a statement with these called an amortization statement. This statement shows a breakdown of every loan payment you must make for the loan. It also shows the balance of the loan after making each payment. If you have a 30-year loan, you will see 360 payments on the documents. At the end of each line, you will see your ending balance of the loan after making each payment.

The Purpose of an Amortization Statement

An amortization statement can help you see how quickly your loan balance decreases from the payments you make. At any time during the loan, you can pay off the loan balance to close the loan. If you decide to do this during the loan, you could view the amortization statement to see how much you still owe on the principal balance of the loan.

The Other Key Principle of Amortization

When you view this statement, you will see that each payment listed is the same amount. The main difference will be the breakdown of where the money goes from your payments. At the start of your loan, your lender applies most of the money you pay towards interest on the loan and very little towards the principal. As time passes, this will change. At some point in your loan, the lender will apply more of your payment amounts to the principal balance instead of interest.

The reason that the breakdown changes is due to the balance you owe. When you owe more money on a loan, which you will at first, you pay more in interest. As your balance goes down, you pay less in interest. If you want to pay off your loan faster, you can by making higher payments to your lender. You can accelerate your mortgage by doing this.

If you have questions about your mortgage, ask a lender today.