Begineers Guide To Amortization


Begineers Guide To Amortization

Begineer's Guide To Amortization
Most of​ us have done it​ at​ a​ point or​ another during our lives however most of​ us do not know that the term is​ called amortization .​
Amortization in​ its simplest term means paying off your loan over a​ period of​ time .​
Amortization is​ pretty general and does not just relate to​ home loan or​ mortgages .​
It can be used to​ refer to​ your car loan, credit card bills etc.
The process of​ amortization is​ usually determining how much you need to​ pay for each payment over a​ set period of​ times .​
It is​ usually calculated by the loan amount, the time period in​ which you have to​ pay back, the amount per payment and the interest rate.
An example would illustrate the above point better.
Take for example you brought a​ house for $150,000, you pay a​ deposit of​ $20,000 .​
So you are left with a​ home loan of​ $130,000 .​
Suppose you found a​ lender who is​ willing to​ give you the loan that is​ for a​ period of​ 30 years with an​ annual interest rate of​ 7%
So how much would be your monthly payment?
First we divide the principle loan amount which is​ $130,000 with the time period in​ months .​
That would be 30 times 12 equals 360 months .​
You also need to​ factor in​ the interest rate of​ 7% .​
When you add up, the monthly payment would be around $870.00.
Besides calculating the monthly payments, for amortization loans, the interest payment is​ first deducted and then followed by your loan .​
However, it​ does not mean that the first payment is​ totally used to​ pay interest but rather parts of​ it.
Taking our previous example, the monthly payment of​ $870.00 .​
About $760 will be used to​ repay interest while the rest ($110.00) is​ used to​ pay off your principle loan amount .​
For each subsequent monthly payment, the amount of​ interest paid is​ reduced .​
Eventually after as​ you approached the 30-year period, your interest paid would be minimum while the majority of​ your monthly payment goes towards repaying the principal loan.
Quite clearly as​ you can see, for each new loan you take out, the early monthly payments will be used to​ pay off the interest with only a​ small portion towards repaying your loan.
As you can see, amortization is​ quite a​ complicated matter .​
Most people would never be able to​ calculate the amount of​ interest and the amount that goes into repaying the principal loan per month .​
Thankfully, there are many free amortization calculators available on the internet .​
You can use them to​ calculate your monthly payment before deciding which loan to​ take .​
Your lender will also provide you with these information when you take a​ amortization loan.






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