How Does Loan Amortization Really Work?

For buyers who require a mortgage loan to purchase a home or piece of property, you're probably wondering what your monthly payments will look like, and how those payments will be allocated to the full balance of your purchase. In most circumstances, borrowers will have a fixed repayment schedule over the repayment period of the loan, called a loan amortization.

Loan amortization provides borrowers with a clear and consistent picture of how much they will be repaying during each repayment cycle. Payments will be made in regular installments in a set amount that consists of both principal and interest. MHQ Mortgage Headquarters of Missouri explains in further detail the breakdown of loan amortization and how the schedule works over time. Take a look. 

What is Loan Amortization? 

Amortization is the process of spreading out a loan into a series of fixed payments over time. A fixed rate loan can also be referred to as a fixed payment loan. However, the amount of principal and interest paid changes with each payment. An amortized loan payment first pays off the interest expense for the period while the remaining amount reduces the principal. As payments are made over time, more and more of each payment goes towards your principal and you pay proportionately less in interest each month.

Interest Paid

The math behind "amortization" or paying a loan off in a fixed period of time starts with the amount of interest that is earned by the lender. This is based upon the rate and principal amount of the loan.

Example: $200,000 X 5.00% = $10,000 per year of interest paid
Periodic Payments

Most loans are paid on a monthly basis. If we used the example above and divided the annual interest expense of $10,000 by 12 months, we get $833.33. However, the amount of interest paid each month declines.

Principal Reduction

Each payment also includes a principal portion, which reduces the loan balance. As the balance falls, the amount of interest that's due with each payment also goes down. Because the monthly payment stays the same, there's more money left each month to add toward the balance. More principal paid = less interest due, less interest due = more principal paid.

When lenders collect more interest in the early years of a loan, they are only collecting what's earned as it's earned. The amortization allows the monthly payment to remain the same throughout the life of the loan. A borrower can always pay extra toward the principal both to shorten the loan term and reduce the total amount of interest paid.

Loan Amortization: The payment is fixed, but the makeup is not.

Trust MHQ Mortgage Headquarters for Your Mortgage Needs!
Now that you know more about loan amortization and how it affects your monthly payments and overall loan repayment over time, you can make an educated decision on a loan option that is right for you. We can help you make that choice. We've got more than 20 years of experience in the mortgage lending industry, and make it our business to find the right mortgage for our clients' financial needs! Ready to buy a home? Let's talk mortgage options!

Mortgage Headquarters of Missouri, Inc
4824 Osage Beach Parkway, Suite 1
Osage Beach, MO 65065

Office: (573) 302-9990
Toll Free: (888)799-1206
Fax: (636)648-9917

NMLS # 1229111

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