Amortization | The Ups, Downs, and Sideways
If you’ve contracted for any type of loan in your life, then you’ve possibly heard the word ‘amortization.’ But if you’re just now working your way through the mortgage loan process, amortization means the gradual repayment of a mortgage loan, both principal and interest, by installments. For the most, a repayment of a mortgage loan happens once a month with some mortgage loans only paying interest for a specified period of time, with a large payment at a specified time. This specified time and payment are written into the mortgage loan contract.
Mortgage brokers and mortgage lenders can give you an amortization table which indicates the length of time required to amortize the mortgage loan. It is also described as a time table or schedule to give you a breakdown of your monthly payments into principal and interest. You can use this schedule to figure out the amount of principal you’ll repay during your mortgage term.
An amortization table is also useful if you are refinancing your mortgage loan. With nearly every mortgage loan there are closing costs, and any good mortgage broker should be able to tell you if refinancing is in your best interest. On the surface you might save money on a monthly basis, but you should also look into how long it will take you to pay off your closing costs.
For example:
Total Closing Costs/Monthly Savings = the Number of Months to Recoup Closing Costs
And in numerical terms it could be something like this.
Closing Costs: $3,450/Monthly Savings: $346 = # of Months to Recoup: 9.9 months.
Generally speaking, anytime the number of months is under 24 months is good. However, and there is always a however, there are other reasons people refinance a loan. A person may live in a 4 Unit Tenants in Common (TIC), splitting the one mortgage loan four ways based on the percentage of property owned. It might be beneficial after a few years to convert the 4 Unit property into condominiums, with each owner now having their own loan and own property, which is a condominium. A tenant may not save money on a monthly basis, but they only have to worry about their loan. In another case, a person might be divorcing or dissolving their personal or business relationship. They simply want to buy the other person out of the property. Therefore a monetary savings isn’t as important as a peace of mind.
An amortization table, like the one below, is helpful to factor what your new payment (including principal and interest) might be.
Amortization Table
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