Understanding Mortgage Amortization

By Karen Lawson
LoanPage.com Columnist

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Planning and knowledge can go a long way in helping you find a home and mortgage that accommodate your lifestyle and goals. Before you start shopping for a home, you'll want to understand how amortization can impact your choice of mortgage loans.

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Know Your Present and Future Financial Situation

Many people fall in love with a home, and may take the first mortgage they can get in order to expedite their home purchase. Ideally, it's best to shop for a mortgage before looking for a home. Factors that can influence what type of home loan will match your needs include:
  • » Knowing how much home you can afford.
  • » How long you intend to live in the home you're buying.
  • » Future expectations of income and assets.
Mortgage lenders have created home loans that offer low starting payments to help buyers get into their first home. Depending on how these mortgages are structured, their interest rates can adjust in different ways according to their terms. Adjustable rate mortgages (ARMs) may also include terms such as adding deferred interest to the principle balance of the mortgage. This is called negative amortization, and means that your mortgage balance will increase, rather than decrease as it would with a fully amortized fixed rate loan.

Why Mortgage Amortization is Important

Amortization refers to how your mortgage is paid off over time. A fully amortized mortgage provides for the amount of principle paid to increase with each payment. With each payment, more is paid against what you owe on your mortgage, and less toward interest. You can use free online mortgage calculators to see how this works. ARMs and other exotic mortgages may not apply any of your payments toward principle, and may not cover the entire amount of interest due. Unpaid interest is added to your mortgage balance. This may not matter if you plan to sell your home within a few years, or anticipate increased income.

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

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