If you’re buying a house, there’s a good chance you’ve heard the term “amortization.” You may know that it has something to do with principle and interest on your loan, but that’s about it. Understanding what your amortization schedule is and how it affects your payments might end up being one of the most important pieces of information you receive when figuring out how much you can borrow for your new home.
Basically, an amortization schedule tells you how much you pay towards your loan and its interest each month. At the beginning, you’ll notice that most of your payment is interest and very little is principle. It’s a little frustrating to be honest. Despite the amount of money going out each month, you won’t see the principle going down much at all. But make sure you look ahead – the longer you pay on your loan and interest, the less interest it will be and the more principle you’ll be paying down. You’ll notice that even though your payments have stayed the same, you’re paying more principle than you were when you first started.
There are various amortization schedule calculators online, and using those is way easier than trying to figure it out on your own. The basic theory of an amortization schedule is that you pay your interest percentage, for example 4.5%, on your loan amount, for example $320,000 at the beginning. And even though you’re not paying much principle off at the beginning, you will be paying off some, so the interest rate is multiplied by the new principle number each month. At the beginning, these numbers go down very slowly, but toward the end of your loan term, they go much faster because a larger portion of your payment is going to principle.
If you can discipline yourself to pay down your loan in bigger chunks when you can afford it, the extra money you put toward your loan will go to the principle, making your principle amount go down much faster. Depending on your long-term goal, you may either have the choice of reducing your monthly payment or you could end up shortening your loan term.
Make sure you talk to your Hagan agent about what you can afford. If you have questions, we can go over the amortization schedule with you to make sure you understand exactly where your money will be going each month and how you make your money go a little further.