Before I every bought my first home, I knew little about amortization. I mean, I vaguely remembered doing problems involving amortization in my finance classes back at college, but I really had no real world examples to which to personally apply them back then.
After closing on our first home though and receiving an amortization schedule with the packet of information that came along with our mortgage, I quickly realized the importance of amortization and how an amortization schedule calculator could be quite valuable to me as a homeowner.
What is an amortization schedule?
Some soon-to-be homeowners working toward getting their first mortgage might think that their monthly mortgage payments will be split evenly. I mean, it makes sense, right? If a mortgage payment is $1,000 a month, wouldn't it seem likely that $500 of that amount would go toward interest on the loan and the other $500 should go toward principal? But it doesn't work this way. In most cases, a loan payment structure will be weighted so that initially more of a payment goes toward interest with less going to principal, gradually reversing this trend over time. This is what an amortization schedule is for. It shows how each payment is broken down between interest and principal over time.
Using an amortization schedule calculator
With the Internet as a tool these days, it can be super easy to use an amortization schedule calculator. About the only information necessary is the amount of the loan, the interest rate, and the length of the loan. With these three bits of information at hand, an amortization schedule can breakdown how payments will look over time. Then, a good calculator could provide for adjustments based upon extra payments occurring at regular intervals or in lump sum amounts.
Why is an amortization schedule calculator beneficial?
Knowing how payments are broken down through an amortization schedule might not seem that important. Such a calculator might at first glance appear as more of a novelty than a useful financial device. However, I found this device to be a quite helpful item in my repertoire of financial tools.
First off, an amortization schedule calculator can show how extra payments make a difference in the amount of interest paid on a loan over time. Seeing one additional payment a year cut thousands or even tens of thousands of dollars of interest of a loan over its lifetime can serve as a strong motivator to work toward paying off a loan faster.
Second, seeing the breakdown of interest versus principal may play a role in the length of time you plan to stay in a home. Realizing that if gaining principal in a home is a main goal of living there, that during those first few years you might only be putting an average of $300 of each $1,000 mortgage payment toward principal could play a part in how long a stint must be put in before reaching the goal of a particular principal amount built in a home.
And third, being able to adjust for mortgage interest rates can also show how just slight variations in such rates can make a significant difference in interest paid, helping decide whether it could be worthwhile to refinance a loan at a lower rate.
All these factors can make a seemingly insignificant financial calculator one of the most valuable financial tools available to homeowners.
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The author is not a licensed financial, mortgage or real estate professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Calculations have not been verified by a professional. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
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