In lending, there is no question too basic, the details are important, and those details are not always the most intuitive.  Amortization is one of the key elements of a mortgage used to purchase or finance property you already own.  Knowing how amortization works can help you make informed decisions whether you are planning on purchasing, or if you are a borrower already.  

Amortization is a financial term that can seem daunting, but it’s actually quite simple to understand.  Essentially, amortization is the process of spreading out loan payments over a specified period of time. 

Amortized mortgage payments are split into two parts—a portion for interest and a portion for principal (the original amount borrowed). As payments are made, the principal balance decreases until the loan is paid off in full. 

For example, let’s say you take out a loan for $500,000 with an interest rate of 5%, amortized over 25 years. Your amortized payment would be $2,922.95/month. Of this payment, $2,083 would go towards interest, while $840 would go towards principal in the first month. 

Over time, the portion of your payment representing interest will decrease as more and more of your payment will go toward the principal (the original amount borrowed).  The last payment on the loan will be fully applied to the principal balance as there will be no remaining interest balance at that point.  

As always, if you have any mortgage questions, please feel free to reach out, I’m here to help.