Understanding How a Home Amortization Schedule Works

The amortization schedule for a home mortgage shows the buyer how much of their payment is going towards interest and principal. Home buyers need to familiarize themselves with how the schedule works as they can utilize the information when looking at the mortgage rate that is available to them. The schedule is usually available in a quote for a potential mortgage. Always keep in mind that mortgage quotes are just that – a quote. The mortgage rate that is shown on a quote may or may not be the final one that is given when the loan closes. So, when looking at a mortgage quote and sample amortization schedule, remember that the numbers can and do change.

The amortization schedule uses basic math equations to come to how much interest is going to be charged to the principal that month. There are different variables and rounding of numbers that occurs when coming up with the number, which wind up shifting the final amount by a dollar here and there. Overall, the impact to the final monthly number is minimal with the moving around of the numbers.

The variables that go into the schedule are the amount of the loan, its length which is typically 30 years and the interest rate. The type of amortization is also a factor, and for an amortization schedule, it is monthly. Interest rates are figured on an annual basis, also known as APR. For example: a four percent interest rate breaks down into .333 a month.

There are two separate calculations that go into the table; one determines the monthly payment by dividing the amount of the loan by the length of the loan. A 30-year loan consists of 360 months, so 360 gets divided into the purchase price. This is where the math gets a little strange as the division is not always accurate. Adjustments are made accordingly to ensure that payment adequately cover the loan. Even so, there may still be a few dollars left to pay at the end.

Interest is calculated on the total amount of the loan for that month. The aforementioned .333 percent is the interest rate for the balance. For those who are at the beginning of the mortgage, the amount of interest paid is high, with little of the payment going towards the principal balance. As more payments are made, the amount of interest lessens due to the lower principle balance left. The principle can also be lowered by paying a little extra every month and making a notation to apply it to the principle.

Consider keeping these formulas in mind to mind when looking at mortgage quotes to get a general idea of the monthly payments.

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