Amortization helps borrowers repay their loans faster. It is
essentially a repayment schedule that initially devotes a large
part of your mortgage payment toward the loan interest.
You may be wondering why you wouldn’t want to pay down
the principal first. The answer is that amortization allows your
mortgage payments to stay the same from year to year. If you paid
the principal first, you would probably be required to make large
payments at first, with smaller payments toward the end. Such
a system is not ideal for most borrowers.
Payments that change make it difficult to draw up a long-term
budget. On the other hand, stable mortgage payments mean never
having to be surprised or to re-budget.
For amortization to work, a stable interest rate is necessary.
Therefore, it is only available with fixed-rate mortgages. Before
you even begin to repay that fixed-rate mortgage, your lender
will crunch numbers to determine exactly how much interest will
build up over the term of your loan.
The accumulated interest, combined with the money you borrowed
in the first place, will be spread over the term of the loan.
That is how your lender arrives at the amount of your mortgage
You will be given a schedule that essentially shows you what
will be paid when. In other words, the amortization schedule details
the amount of your mortgage payment which goes toward the interest,
as well as, the amount which goes toward the principal. Though
these amounts may vary from month to month, the mortgage payment
itself always stays the same.
You should be aware that amortization does mean that it will
take some time to build equity in your home.