Amortization: Why Should I Care?
Filed under: Mortgage Rates
Amortization is the financial means to help you pay down principal on your loan each and every month. Every payment you make goes to pay principal and interest. That’s why I like to look at amortization as a forced savings plan. Honestly, it’s one of the biggest blessings that I have personally experienced on my own home.
How Amortization Works
Here is an example of how amortization works: If you were to get a $400,000 mortgage, each month you’ll be “forced” to pay about $460 towards that principal balance. The rest of your payment will be applied to interest costs. Over time, more and more of your payment will be applied to principal and less and less to interest. So, $460 may not sound like a lot up front but over a years’ time, that’s thousands of dollars you’ve paid toward your home loan. If you look at an amortization schedule over ten years’ time, it could be close to $100,000 dollars that you’ve paid down on your mortgage. Now that is something to be excited about!
I don’t know about you guys, but I would have a difficult time saving an extra $100,000. This is a scenario where I am going to live somewhere anyway, so I might as well have that $100,000 come to me after the end of the ten-year period. And that’s why you should care about amortization. Unlike rent, where every last dollar you spend on housing is gone for good, amortization is the means by which you get to keep the money you spend on housing. The principal you pay back is quite literally your money in the form of equity in your home.
The Power of Amortization
Many people never understand the power of amortization. When used correctly, this financial mechanism will allow you to leverage the bank’s money over time to keep more of your own money. Since most people don’t have the ability to pay cash for their home, the next best thing is a good home loan. Amortization is the way you will eventually pay it off.
Are you looking for a home in Temecula? Contact me for a conversation about what kind of mortgage solution will work best for you. Call, text or email: (951) 473-0390 or [email protected]