Paying Off Your Home – The Importance of Amortization
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Every time you make a mortgage payment, a portion is paid to the principal of the loan and the rest goes toward interest costs. Amortization can be used in your favor to help you pay down this loan, eventually leading you to a financial situation where you can live in your home mortgage-free. Essentially, amortization works as a forced savings plan – and it’s a great blessing to your family over time.
Amortization: How it Works
Here is an example to help you understand how amortization works:
When you have a mortgage for $400,000, every month you have a required payment of about $460 that goes towards the principal balance. The remainder of the payment is applied to interest costs. As the loan progresses, more and more of the payment is applied to principal, with a smaller amount going to interest.
Even though $460 doesn’t sound like a lot, it can definitely add up. In a year’s time, you’ve paid your home loan down by thousands of dollars and built equity in the property. Look at an amortization schedule over 10 years, and it could be as much as $100,000 that is paid down on the mortgage.
Saving an Extra $100,000
If you are like most people, it sounds difficult to save an extra $100,000 in the bank. Regardless of your current season in life or cash situation, you can have $100,000 come back you at the end of the 10-year period.
This savings plan (in the form of home equity) is why you should care about amortization. With rent, every dollar spent is gone – you will never get that money back. On the other hand, amortization gives you a rebate back on the money you are spending on housing. The principle is literally money that’s yours in the form of home equity.
Leverage Your Cash
Many people don’t catch the vision of how amortization can work for them over time. When this strategy is used correctly, it can give you leverage over the bank’s money so you can keep more of your own money in the future. It’s not common for homebuyers to have cash to pay for a home, so the next best thing is to use amortization to eventually pay off the property.
If you have any questions about buying a home, or you are ready to start looking for a property, I’m just a phone call away. Call, text, or email me at (951) 473-0390 or [email protected].