First Person: Factoring Amortization Into Buying a Home

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The internet can be such a useful tool. Sure, it can be highly distracting and sometimes very frustrating, but used in the right way, it can be extremely educational as well.

I still remember calling our bank after making extra payments toward our mortgage to get a new amortization schedule. They said it would cost $10 so I told them to forget it. However, with the power of the Internet, it's much easier to see how amortization (the amount we pay toward interest and principal each month) can affect a mortgage by way of an amortization schedule calculator.

Length of stay

It might seem like the same amount of interest and principal from each payment would go toward loan payoff; however, this isn't the case with amortization. In fact, at the beginning of a loan payment period, 75 percent or more of an actual monthly payment amount (depending upon the loan terms) could be going toward interest. Therefore, if the plan is to only stay in a home for several years rather than the full term of the mortgage, it could minimize the actual amount of equity built in the home due to more money going toward paying interest than equity. In fact, it could take almost half the term of a 30-year mortgage just to get to a point where a payment is being equally split between mortgage and equity.

15 versus 30-year mortgages

Knowing how interest can add up over time, our family decided to choose a 15-year fixed rate mortgage rather than a 30-year mortgage. In the process, not only did we get a lower interest rate, but by using an amortization calculator we can see that we would have shaved almost $130,000 in extra interest off the entirety of our amortization schedule compared to the longer loan timeframe. While we ended up selling before the term of our loan expired, it's a great example of how understanding such information could save huge sums of money over the course of time.

Making extra payments

It's amazing just how big a difference making extra payments can have over the course of a mortgage. Thankfully, we realized this early on in our home-payoff process. Finding that making just one extra payment every year would cut nearly $10,000 off our interest over the course of our 15-year mortgage acted as a big incentive to pay off our mortgage quicker.

Factoring in interest rates

The interest rate when buying a home can play a huge factor in just how much is paid on a home over time. Seeing this on an amortization schedule can be a real eye opener. Realizing that on a $165,000 mortgage the difference between a 5 percent rates and a 6 percent rate over the course of a 30-year fixed rate mortgage could equate to a difference of nearly $37,000 in interest may give a little more urgency to paying off a loan quicker or looking for a loan with a better rate.

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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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