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Amortization

When you are looking for a home loan, you will often hear the term "amortization" and may wonder what it really means.  Your loan officer may tell you that the loan will be fully amortized over the period of 30 years, but you may not understand exactly what that means to you or your monthly mortgage payment. 

Amortization is the method used to calculate the amount of principal and interest that will be paid over the entire term of a loan.  Each monthly payment will include a portion that is applied to the principal and a portion that is applied to the interest.  Each month the total will go down until you have paid off the entire loan.  The process of figuring out how much will go to interest and how much will go to principal is called amortization. 

When you look at the amortization schedule your loan officer will provide you, you will be able to see how much you will be paying each month and how it will be divided up for the entire 30 years of the loan.  You will also be able to see the totals, which will equal the initial amount of the loan, or the principal as well as the total amount of interest you will end up paying over the term of the loan.  You may be surprised, but you will actually end up paying interest that totals at least 3 times the principal amount of the loan.  Looking at the amortization schedule from the different lenders will help you make better comparisons between lenders. 

The interest rate directly affects the amortization of your loan, whether you are getting a mortgage refinance or a new home loan, you will want to pay attention to the interest rate you are being charged.  Right now, you will find that interest rates are quite low, so you will find that mortgage refinancing and even getting a bad credit mortgage can happen with competitively low rates.  This is very good for the person getting a loan because with a fixed rate loan your amortization schedule will show that you will pay a lower total amount of interest over the life of the loan. 

Now you understand the importance of amortization and how it works.  Your lender will provide you with a Good Faith Estimate when you apply for a loan, and it will usually contain the amortization schedule so that you can easily see the totals that you will be required to pay over the life of the loan and how they are spread out among the monthly payments.