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Amortization

As you pay down your mortgage loan, some of your payment goes toward the principle of the loan, and some goes to the bank as interest for their hard work of lending you the money.

The schedule of these payments is known as amortization.

Strictly speaking, amortization is the paying off of an intangible debt, such as a mortgage loan, with regular payments toward principal and interest over a set period of time.

To calculate an amortization of a mortgage, use a mortgage calculator. If you’re refinancing your mortgage, your amortization schedule will change – the principal will remain the same, but the interest you pay will change. Your amortization will also change if you hold an adjustable rate mortgage, and the rate adjusts after a set period.

Also, when people refinance, they will sometimes switch from a 30-year to a 15-year mortgage to save money on interest expenses; make sure you understand the effects of these changes on your amortization schedule before you do so.

Posted in Refinance Glossary.