What is Amortization?

Amortization is the method used to pay off debt over a specific time period with even regular payments. All mortgage payments are based on the amortization method. Under this system, you only pay interest on the remaining principal balance. As the principal reduces over time, the amount of interest charged drops. Because your payment is designed to remain fixed over the life of your loan, you pay more interest up front, but get the bulk of your payment going towards principal near the end.

If we were to graph the amortization schedule of payments for various Fixed-Rate mortgages, it will give you a better understanding of how the system works and looks like.
Amortization #1
Amortization #2
Amortization #3
Amortization #4

One glaring observation from the above graphs is the lower the interest rate, the less interest that is charged, and therefore more of your payment goes towards principal in the beginning.

It has always been hard for consumers to grasp how amortization works. I developed these graphs years ago to help them understand how their monthly payment is allocated. When you get your monthly statement from your mortgage loan servicer, they will always have a section in the statement that shows how your payment was allocated. A portion to principal, a portion to interest, and if impounding, a portion for taxes and insurance. I always tell my clients to look for that magical month when the allocation of payment is equal between principal and interest. It is at that point when you are “heading into the home stretch” !!

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