Amortization

Eugene-Delacroix-Hamlet

The latin root of Amortize is ‘mort’, which means death

Amortization is the process of repaying a mortgage loan’s principal and interest through monthly payments. Each payment reduces or amortizes the loan balance. Interest is “front loaded” meaning that although your payment remains the same each month, a higher percentage of the payment goes to interest at the beginning of your loan.

Since your payment is fixed, inflation works in your favor. You are borrow today’s dollars and paying them back with the futures inflated dollars. This lessons the blow of interest.

A lot of home owners may be surprised at just how much interest they end up paying over the life of their loan. I like Bank Rate’s Mortgage Calculator. Load an amortization table and you might be surprised!

A 15 year fixed mortgage will pay less interest than a 30 year fixed. But which is better? The advantages with a 15 year fixed mortgage is that you will get a slightly lower interest rate than the 30 year fixed. The disadvantage is that your monthly payments will be higher. I usually recommend to get a 30 year fixed mortgage, because you can always choose to make an additional payment or two each year that will accelerate it to a 15 year schedule, however if you run into trouble one year, you won’t have to worry about getting behind. I understand that some owners won’t make the additional payment unless they have to, and in that case a 15 year fixed might be better.

 

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