If you’re looking to buy a home, or already own a home, it’s important to understand how amortization works, as it ties directly to your home’s value.
Every loan has an amortization table tied to it, detailing the amount of principal and interest paid each month, ultimately providing you with the true cost of your home over the life of the loan.
Your lender can provide you with a copy of your amortization table, spanning the full term of your loan.
You bought your home for $150,000 with a down payment of 10%, resulting in a loan amount of $135,000. You secured a 30-year fixed-rate mortgage at 4.5% interest with a monthly mortgage payment of $684.03.
Following are highlights from the full amortization schedule on your loan.
Assuming that you stayed in your home for 30 years, you would pay over $246,249 in principal and interest over the life of the loan. To illustrate the power of interest rates, on this same loan with a 7% interest rate, you would pay $323,337 in principal and interest.
As you can see, in the beginning years of homeownership, the largest portion of your payment is applied to interest versus principal and you're building equity at a slower pace. As the loan progresses, you see more of your payment applied to your principal, paying down your balance at a faster pace.
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