Amortization Mortgage

Amortization Mortgage

An amortization mortgage requires the repayment of the amount borrowed by periodic repayments, usually monthly, over an agreed period of time.

Amortization mortgages are frequently used to pay off home loans by equal monthly instalments. There are two parts to an amortization mortgage, namely the principle amount that is the sum of money borrowed, and the interest amount that is the benefit due to the lender for providing the money.

The principle is at its highest at the time the loan is initiated, and in the early years most of the monthly repayments mainly pay off the interest, with a relatively small sum being applied to reduce the amount borrowed. During the latter years the situation reverses and a greater proportion is applied against the principle. Some borrowers have failed to grasp this aspect and have been disappointed, to learn how much of the principle remains, if they have decided to pay off their mortgage, even after an initial period of ten years or so into a thirty year term.

Monthly Repayments

Repayments for an amortization mortgage are frequently based on adjustable interest rates. As rates fluctuate upwards or downwards the monthly repayments are adjusted so that the loan is still repaid within the agreed term. It is possible, at the outset to negotiate to have the interest rate capped, which would mean that if market rates rose steeply, the full extent of the increase would not be charged by the lender. However, that would mean that the period or term of the loan would need to be extended. Some borrowers would prefer to limit their exposure to market trends in this way.

Those who wish to have their mortgage interest capped, should make their intentions clear from the outset, and negotiate what is called a negative amortization mortgage. The way in which interest rates are calculated on adjustable rate mortgages may vary from lender to lender. Adjustments may be made quarterly, bi-annually, annually, or by some loan sources, shortly after prime rates move up or down.

Mortgage Calculators

There are some excellent mortgage calculators on the Internet that are not difficult to use. It is possible to construct tables showing the effect of mortgage repayments year on year. It is a useful exercise because people's circumstances change and they may wish to reconsider their position. For instance there are times when the mortgage market is more competitive, and re-mortgaging may save considerable amounts of money.

Remember always that you should discuss your requirements with a reputable, qualified mortgage adviser. Even prospective borrowers who are proficient at understanding such matters, can gain from a second, or even a third opinion.