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Understanding An Amortization Schedule
In
simplest terms, amortization
is the elimination of debt by making steady payments
over a period of time.
When you take out a loan, you borrow a certain amount
of money. Then, the lender charges you interest for
using their money. When you pay off the debt through
installments, your payments are divided in order to
pay both the interest balance and the loan principal
amount. However, the division is not split 50-50.
With amortization, your early payments will mostly
go toward paying off the interest. As you pay through
your mortgage,
the percentage of your payment that is applied to
the principal will increase.
To get a clear understanding of exactly how amortization
works, it helps to look at an amortization schedule.
This will show you each payment, how much of it went
toward interest, how much of it went toward principal,
how much you owe on the loan and how much total interest
you've paid so far. If you don't have access to an
amortization schedule of your own, you can find free
amortization
calculators online.
The most important thing you need to know about amortization
is that is is dependent on you making regular, consistent
payments. If you begin to skip payments or make partial
payments, you could end up with negative amortization.
This is when your principal balance actually increases
due to the interest not being paid. Whenever the interest
is not paid, it is added to the principal balance,
causing you to owe even more than you originally signed
up for.
For more information on amortization, talk to your
mortgage consultant or a qualified lender in your
area.
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