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What does amortization mean?

Amortization is the process of paying off a loan in a series of fixed payments. Each instalment is directed toward either the loan principal or accrued interest.

A mortgage loan starts with a large portion of the payment going towards interest, with a much smaller amount applied to the loan principal.

You can think of this as a type of insurance policy for the lender. They want to get their money back as quickly as possible.

Over time, this allocation switches, and the principal will gradually begin to receive more and more each month.

While the split changes over the life of the loan, the monthly payments remain constant.

What is an Amortization Schedule?

Amortization gives you better insight on your payment distribution.

An amortization schedule breaks this concept down even further. The schedule can be referenced to further understand how your loan disbursement will fluctuate over time.

Here’s an overview of what an amortization schedule will provide you with:

• Scheduled Payments: each monthly payment is individually listed for the span of the loan.
• Allocation: how much of the total payment has been put toward the principal loan versus interest at a specified date.
• Remaining Principal: the total amount owed on the principal currently or at a future date.
• Interest Expenses: how much interest you will have paid over the life of the loan or at a specific date.
• Extra Payments: how an extra payment or recurring extra payments will affect the total interest paid and decrease the loan term.
• Equity: an amortization calculator can indicate how much equity you will have in the home at any given time during the loan period.

Amortization Schedules and Extra Payments

The information provided by an amortization schedule makes it much easier to look at the loan from a bird’s eye view and evaluate your options.

You can use the calculator to determine how much you’ll end up saving in interest by paying off the debt early or making extra payments.

An extra payment can be made with a larger sum of money, annually or semi-annually, for example. Or you can add a little extra to each mortgage payment.

It’s important to double and triple check that this additional money is going directly toward the loan principal and not towards interest.

The calculator will then show you how those extra payments will cut time off of the loan and how much money could be saved on interest. You’d be surprised how a few extra payments can significantly reduce each.