In mortgages, the most important concept to consider is amortization. It’s the process of paying off the balance of your Utah housing loan in Ogden, Salt Lake City, or Provo, with regular and equal payments. While every periodic payment looks the same, each is divided into different portions to cover different expenses, such as the interest and principal.
It may seem basic, but misreading amortization process could cost you a lot of money down the road. Whether you plan to refinance down the road or keep the loan until the end of the term, debunk these misconceptions to make informed decisions:
The Bulk of the Initial Payments Always Go to Interest
The interest is at its highest during the first months of the loan, but it doesn’t necessarily comprise most of the initial payments. In some mortgages, you could make real progress on debt repayment even during the first half of the term. To know how much your interest cost will be per month, read the contract to see the actual amortization table.
Stretching the Loan Saves You Money
A common mistake to “save money” is lowering monthly payments by extending the term of the loan. Compared with a 15-year, fixed-rate mortgage, securing a 30-year loan for the same amount is usually easier to manage. If you look at the amortization table, you’d actually pay for more interest over the life of your mortgage.
The only reason your payments would appear reduced is that you increase the number of months to repay the loan. The lender would take a greater risk by letting you borrow the money for a longer time; hence, the higher interest.
Interest-Only Loans Are Also Amortized
During the “tease rate” period, 100% of your payments would cover the interest. Unless you pay extra per month, your principal would remain the same until the introductory period expires. Until then, you wouldn’t be able to repay the principal of your loan on a fully amortized basis.
Honest lenders would walk you through amortization to know where your monthly payments go throughout the loan term. Mortgage providers may offer unique financial products, which is why interest and principal costs could amortize differently depending on the lender. If you understand the basics, though, you should be able to wrap your head around rather complicated amortization models.