Mortgage Amortization and Your Home Equity

by Karen Lawson
Loan Page Columnist

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If you think of the 30 year fixed rate home mortgage loan as plain vanilla, then today's mortgage shoppers have a wide array of "flavors" to choose from. It's important to match mortgage terms to your plans.

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Qualifying for a Mortgage: Get Your Foot in the Door

Many first time buyers tend to be shortsighted when shopping for a new home loan, as buyers often focus only on getting a mortgage. It's important to look beyond your new front door! After you've moved in, you don't want to find out that you can't afford to keep your home, or cannot sell it for what you owe.

The "A" Word and Your Future as a Homeowner

The "A" word in question has nothing to do with drivers who cut you off in traffic. The "A" word in mortgage circles is amortization. Amortization refers to how each of your payments is applied to your mortgage to reduce its principal balance and pay the interest due on the loan. A fully amortized mortgage loan applies very little to your loan balance during the first few years. Most of your payment goes toward interest, which does not reduce the amount of your loan.

If you buy a home with little or no down payment, and have a mortgage with standard amortization, you may not build much home equity for the first few years unless property values in your area rapidly increase. This can cause problems if you get a mortgage that defers part of your payment and adds the unpaid amount to your principal balance. In effect, you are paying for a loan that is increasing rather than decreasing! When shopping for a new home loan, make sure you understand all terms of any mortgage you're considering.

About the Author
Karen Lawson is a freelance writer with more than 15 years of experience in mortgage banking. She holds a master's degree in English from the University of Nevada, Reno.

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