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.

Article Source: http://www.moneyarticlelibrary.com

Ricky Lim works in a finance company specialising in Home Refinancing Loans. Visit his site for Free Home Loan Calculator

Please Rate this Article

5 out of 54 out of 53 out of 52 out of 51 out of 5 

Not yet Rated

Click the XML Icon Above to Receive REAL ESTATE Articles Via RSS!

Additional Articles From - Home | Real Estate

• Considering the Value of Recreational Land - By : Hayden Antonio
  
• 5 Top Misunderstood Real Estate Investment Terms Worth Knowing - By : jrk
  
• Why Selling Rental Property is Easier than Real Estate Agents Think - By : jrk
  
• How An Equity Release Calculator Can Help You - By : Kevin Stelfox
  
• How To Choose Real Estate Investment Course Information For You - By : Brad Wozny
  
• Why Are U.S. Real Estate Sales up 4.1% Despite Expert Predictions? - By : Brad Wozny
  
• Foreclosure Listings Know The Details - By : Bill Dufrane
  
• Real Estate in Chicago - By : Paul Gorney
  
• Foreclosed Properties Not Just For Investors - By : Adam Masterson
  
• Foreclosures Can Mean A New Source For Profits - By : Mathew Smith
  

Related Articles:

• 5 Tips On Making Your Business Card A Powerful Marketing Tool
• Furniture Fixes On A Dime!
• Furniture Fixes On A Dime!
• Use Your House To Pay For Your House
• Use Your House To Pay For Your House
• Your Credit Score Can Be Destroyed By Simple Credit Inquiries
• Your Credit Score Can Be Destroyed By Simple Credit Inquiries