What's Mortgage Amortization?

What’s Mortgage Amortization? Understanding how it works can help you save on your mortgage!

When you begin the home buying process, there’s a lot you have to keep track of.

You need to check your credit, verify your financial info with the lender, get pre-approved, find a loan structure that works for you… the list goes on.

Only after a long list of tasks will you begin searching for a home, and that’s another challenge altogether—especially with how hot the housing market is in 2021.

Between setting up your mortgage and looking for your new home, the entire home buying process tends to be overwhelming, to say the least.

But you’ve set your mind to it. That home you’ve been wanting is worth the effort.

Unfortunately, one critical feature of your mortgage tends to get lost in the chaos of buying a home…

It’s called mortgage amortization, and understanding how it works (and how your lender uses it) could help you save thousands before you even sign the mortgage paperwork. So, if you’re applying for a mortgage, keep reading! We’ll explain what mortgage amortization means for your lender, your home buying journey, and your wallet.

Your Amortization Schedule

Essentially, amortized loans have fixed monthly payments and a solid end date. If you pay for a mortgage or a car loan each month, you’re paying off an amortized loan.

The thing is the principal and interest within your monthly payment changes each month.

When you start paying off your mortgage, your monthly payment will go almost entirely to interest. That’s partially why lenders everywhere amortize loans—your interest payments are money in the lender’s pocket, and the lender wants to make sure they get their money upfront.

To give you an idea of what that looks like, let’s say you take out a $350,000, 30-year loan with a 3.5% interest rate.

Without including taxes and mortgage insurance, your monthly payment would be around $1,571. That doesn’t sound too bad, right?

Well, that number doesn’t tell the full story. Because your mortgage is based on an amortization schedule, $1020.83 of your first monthly payment would go to interest, and only $550.82 would go to your actual loan amount (principal).

This payment schedule is known as front-end loading. Because your lender wants their money upfront, you end up paying off most of your interest upfront.

Eventually, you will start paying off more and more of your loan principal. For example, in the second month of your loan term, you’d pay $1019.83 towards interest, and $552.43 to your loan principal.

This is why your mortgage interest rate is so important—if you get it right, you’ll spend a lot less over the course of your loan payments.

Over 30 years you’ll pay $350,000 for your loan principal, and an extra $215,796.31 to interest over your loan term! That’s your money in the lender’s pocket.

The Consequences

That slow amortization isn’t too good for building equity either. Because you pay so little toward your principal in the beginning, you’ll build equity very slowly at the beginning, and very quickly at the end of your loan term.

So, you’ll need to consider your mortgage structure. 30-year loan terms are far more common because the monthly payments are lower while interest is higher.

Going with a 15-year loan means you’ll pay less towards interest and build equity faster, but your monthly payments will be much higher.

Overall, be sure to choose a mortgage structure that works for your budget. Interest payments are bad, but there’s nothing worse than defaulting on your loan because you tried to stretch your budget into a 15-year loan term.

Balloon Mortgages

Non-amortized loans are very rare today. One of the few options you have to avoid an amortized loan is a balloon mortgage, but you’ll need to be prepared.

Typically, balloon mortgages allow you, the buyer, to make low, interest-only payments each month, leaving the entire loan principal plus any remaining interest at the end of the loan term.

Typically, balloon mortgage terms only last 5 - 7 years, so they’re a potentially good option if you have the savings. In the end, you’ll have paid a lot less to the lender in interest.

On the other hand, balloon mortgages are extremely risky for you and your lender. If you don’t have the cash to pay off your lender at the end of your loan term, you’ll be at risk of defaulting on the loan.

Negative Amortization

Like balloon mortgages, negative amortization mortgages offer low monthly payments with a large payment at the end of the loan term.

Let’s say your monthly mortgage payment is $1,000. In the first month, you owe $900 to the lender in interest, with $100 left for your principal. If you only pay $700, your loan will negatively amortize, because you’re not paying enough to cover the mortgage interest.

You don’t get to pay down the principal, and that extra $200 is tacked onto your principal. So, the overall amount you owe increases.

While negative amortization loans offer a lot of flexibility and ultra-low monthly payments, they’re also a serious risk.

If your home’s value drops or you don’t pay enough, you could owe more than your home’s actual value. This would, of course, put you in debt and at risk of foreclosure.

So, negative amortization mortgages are usually more risk than they are reward. Don’t let a lender rope you into one of these loans unless you know exactly what you’re getting into!

What About Low-Interest Rates?

We know what you’re probably thinking…

If I can’t avoid amortization, I can just get a low-interest rate.

And while that’s true, you won’t really avoid paying your lender all that interest upfront. Even with an interest rate as low as 3%, you’ll still pay up to 70% in interest initially.
In many cases, you’ll pay the majority of your mortgage interest in the first 7 years.

So, if you can’t avoid amortization and your low interest rate won’t help much either, what’s the solution?

Well, let us ask you another question:

What if you could have the best of both?

Money Where it Matters

We’ll let you in on a secret:

You can have the best of both, with the Money Max Account.

It allows you to get a low-interest rate while paying off your debts in less time. We’re talking 7 - 10 years of paying off debt, and then you’re done!

Money Max works by putting your unused income to work. It tracks your payments, expenses, and debts, and then it really gets to work…

You’re left with the exact amount you should pay towards your debts.

That leaves you with thousands or hundreds of thousands of dollars to spend where it matters—that’s money for you and your family.

Don’t waste decades of your life paying unnecessary interest to your lender. The Money Max Account has already helped to get rid of $2 BILLION in mortgage payments and other debts.

Ditch your amortization schedule, all that interest, and your lender, with the Money Max Account.

Ready to jumpstart your debt-free future? Visit our homepage to learn more, or call now! Our representatives are standing by to help you get started.