Your Mortgage Amortization Schedule May Contain Shocking Details
When many first-time homebuyers get their mortgage amortization schedule for their proposed loan, they file it away with all kinds of other paperwork they never intend to look at. This can be a huge mistake for several reasons. The biggest, perhaps, is the simple fact not paying attention to this important document can cost you a ton of money.
A mortgage amortization schedule is nothing more than the month-to-month breakdown of what a loan costs. You can use an amortization schedule calculator to prepare one. The schedule shows exactly how you can apply monthly payments to a loan as interest builds up, and you eventually pay off the loan. The first-time buyer who pays attention to the mortgage amortization schedule will readily see that a $100,000 loan will cost a whole lot more than $106,000 to pay off at a 6 percent interest rate. Having a good understanding of the mortgage amortization schedule and how it works for a particular loan can arm a homeowner with facts you might need down the road to help guide financial decisions. For example, understanding exactly where you are on a mortgage amortization schedule and finally realizing greater principal reduction with payments might steer you clear of a refinance when it could end costing you a bundle in the long run. It might also help guide use of any extra cash that might be available. Principal reduction payments, for example, can take a basic mortgage amortization schedule and throw a big monkey wrench into it by taking away some of the principal the lender calculates interest payments against.
Anyone who has never seen a loan amortization schedule will likely be in for a start the first time they review one. They can look rather scary. Even if you find the lowest rate loan possible, these schedules show little principal decline during the first few years of a loan. This means a $1,000 payment a month over the course of a few years might only reduce principal by a few thousands dollars even though you paid out $24,000. This happens because you normally pay for a large chunk of the initial compounding of interest. Since the principal amount is at its highest, compounding at a rate of 6 or 7 percent can add a huge lump to what the loan costs.
As a mortgage shopper, you should pay attention to the amortization schedule when it's given to you. Doing so can help guide decisions and might even give you some great ideas for paying off your mortgage quicker. If you are looking at a simple interest mortgage, lenders will allow principal reduction payments. Banks don't love this necessarily, but they will apply the payments to reduce the principal if told to do so. This can quickly change the mortgage amortization schedule and have it working in your favor and not the bank's.
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