Mortgage amortization is the schedule of payments to repay a loan over time with fixed, regular payments. The payments are made up of both principal and interest. The word root "amort" means "to kill" the loan slowly. Here are the three things to know about fully amortized loans i.e. your mortgage.
. The monthly payment is fixed
The amortization formula determines the fixed monthly payment. The formula looks complicated but the goal of the formula is to spit out a fixed payment that pays off the loan entirely over time. Everyone likes predictability.
Simple interest is paid in full every month
Mortgages use the simple interest formula where A = P x R x T. So, a $500K loan with an annual interest rate of 6% would pay $2,500 (500K x 6% x 1/12th-yr) of interest in the first month.
The ratio of interest decreases over time
Amortized loans have a changing ratio of principal and interest over time. The ratio depends on the length of the mortgage and the interest rate. An amortization table shows the exact schedule of payments. Principal contributions = fixed monthly payment - simple interest due. So, if the fixed payment is $2,998 the principal contribution in month would be $498 ($2,998 - $2,500)
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