You have been thinking about making the leap into home ownership and are trying to understand loan amortization for the mortgage you are considering. In your research you learn that during the initial period of your loan repayment schedule almost the entire monthly payment goes towards the payment of the interest and very little is applied towards repayment of the principal. While this may be confusing, it is a good idea to understand how amortization works in case you ever decide to refinance or make an additional mortgage payment each year to pay down your principal.
The process can be explained as follows:
Your initial repayment amount that makes up your monthly mortgage payment for the life of the mortgage is comprised of two main components:
1. An initial minimum repayment of principal is established which is dependent on your interest rate.
2. Then there is the interest payment for the money you borrowed to buy your home.
If you want to get more technical, we can break your monthly mortgage payments down into two more components: taxes and insurance (if you choose to bundle those costs into the mortgage itself). All together, each of your mortgage payments include a certain amount that goes toward principal, interest, taxes and insurance. The common acronym for this is PITI. [Read more...]