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How does mortgage amortization work?

If you’d like to find out how does mortgage amortization work, you’re probably looking to buy a new property. Mortgages are complicated. That’s partly because you’re borrowing a lot of money and partly because you’re borrowing over a long period of time. Over time, the value of a property can appreciate or depreciate and the value of money changes with inflation and all of these elements make a mortgage’s real costs over the period of the loan difficult to understand.

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Mortgage amortization

On the surface, mortgage amortization seems to be the answer to the complications attached to mortgages because it simplifies the loan by splitting it into equal payments over the mortgage repayment period. This consistency is great for most people because they can budget for the expense, but the regular value of each repayment doesn’t mean that you’re covering your debt and interest repayments equally each month.

Problems of mortgage amortization

Although each payment is the same for the period of the loan, the initial payments cover a higher percentage of the interest than the loan amount. In this way, the lender gets their profits but your liability isn’t decreasing significantly. This is the biggest shocker with this type of mortgage. Often, homeowners will find that a mortgage taken out with these terms doesn’t make significant inroads into the debt amount until the mid-term. If the mortgage is for 30 years, you’re not going to make a significant impact on your borrowings for 15 years.

Blessing or curse?

The advantage is that the homeowner gets a consistent repayment amount which in real-terms goes down as inflation comes into play, especially with a mortgage taken out over 30 years. Changes in the base-rate of interest that those on a variable-interest rate mortgagehave to be aware of, can be ignored. If you see the mortgage out to the end, you’ll pay a lot of interest, but the downsides are bigger if you decide to move home. Selling before the mortgage is paid off, leaves you with very little by way of return in the property as your early payments go against the interest so don’t take out this type of mortgage without comparing it against other types.

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