Real Estate Term of the Day: Amortization: Loan, Schedule & Term
AMORTIZATION – a gradual paying off of a debt by periodic installments (Barron’s Dictionary of Real Estate Terms)
AMORTIZED LOAN – any loan with at least some payments to principal (Barron’s Dictionary of Real Estate Terms)
AMORTIZATION SCHEDULE – a table that shows the periodic payment, interest and principal requirements, and unpaid loan balance for each period of the life of a loan (Barron’s Dictionary of Real Estate Terms)
AMORTIZATION TERM – the time it takes to retire a debt through periodic payments (the full amortization term) (Barron’s Dictionary of Real Estate Terms)
An amortized mortgage requires periodic payments (typically monthly or bi-monthly) in which a portion of the payment pays for the interest on the loan and the remaining portion pays down the principal balance of the loan. With each payment made the amount paid to principal will continue to increase, while the amount paid towards interest will continue to decrease. The most common mortgage loans have an amortization term of either 15, 20, 25 or 30 years.
There are several ways to decrease the amortized loan term, the two best ways are to:
- pay more than the minimum payment required (try 1 extra payment a year)
- request for a biweekly payment option with your lender
For example, the monthly payment on a $200,000 mortgage with a 30 year term at 6% would equal approximately $1199.10/month.
Option #1: By paying just (1) extra payment a year of $1199.10 it would save you almost $50,000 in interest payments and reduce the life of the loan by 5.4 years
Option #2: By requesting to make biweekly payments you would save over $47,000 in interest payments and reduce the life of the loan by 5.17 years