Defining Mortgage Amortization

Mortgage amortization basically means the schedule in which you will pay off your entire home loan including interest, principal and any other fees that have been added to it. The process of amortization takes place over a predefined period of years. In the initial years, the majority portion of your monthly payments covers the interest part of the loan and as the loan nears maturity, more part of the payments cover its principal part.

When mortgage loans are granted to an individual, an amortization schedule is also provided to them to illustrate the payoff structure. If not, you can calculate your amortization schedule by using All Western Mortgage’s mortgage amortization calculator. You can check it out here.

However, an amortization schedule is not written in stone. There are factors that can tweak or change the amortization schedule. Some of those factors can also alter the overall paid amount.

Positively Changing The Amortization Schedule

When borrowers make additional payments toward the principal during the initial years of the loan, the can effectively reduce the term of their mortgage along with the total interest paid. This is one such way of positively changing your amortization schedule. However, one thing to keep in mind before making additional payments is that there should be no penalty levied by the lender in case of you making early payments.

Negative Changes to the Amortization Schedule

If for whatever reason, you fail to make payments on time or pay less than the due amount, the length of the loan along with the total amount payable can increase.

Whenever you make changes to your amortization schedule, you can calculate the new schedule using All Western Mortgage’s loan amortization calculator. Try it here.

Ways to Determine Your Home Affordability

Buying your first home is as exciting a process as it gets. But, it’s not just about finding the features or the neighborhood that you want. For majority of the people, the price of a home is a major deciding factor. Basically, there are two ways to determine whether you can afford a particular home on your current salary or not.

1.      The monthly housing cost as a percentage of your gross income

The rule of thumb says that your monthly housing costs must not exceed 28% of your total gross income. For example, if your annual salary is $50,000, your monthly take home income will be $4,167. If we follow the above mentioned rule, you can afford to spend $1,167 per month on housing costs. The housing costs, here, will include payment of mortgage installments (principal + interest), real estate taxes and homeowners’ insurance.

This is the most straightforward method of calculating your affordability. However, majority of the times there are various other factors involved in addition to just housing costs when you calculate your affordability.  Such factors can be student debts, car payments, credit card debts etc. This is where the next method of calculating home affordability comes in.

2.       Debt to income ratio

The debt to income ratio method evaluates your home affordability by considering other debt repayments in addition to the housing costs. The preferred ratio says that your entire debt payments must not exceed 36% of your income.

This method paints a more accurate picture of your home affordability. For example, On a yearly salary of $50,000, or on a monthly salary of $4,167, you have the following debt obligations:

·         Student Loan of $200

·         Car payment of $400

·         Credit card payments of $100

Now, if your housing costs amount to an additional $1000, the total comes out to be $1,700 and ideally your entire debt can’t exceed $1,501. This means affording a home that costs above $800 will be a problem for you.

Now that the basics are clear to you, you can check out All Western Mortgage’s home affordability calculator to figure out how much home you can afford. You can check out our mortgage amortization calculator here. 

What is an Amortization Schedule?

The amortization schedule for a mortgage loan is nothing but a table that provides the breakdown of monthly loan repayment installments from the loan’s first payment to its final one. The amount of each installment of a mortgage is divided into two parts. 

One part is used to pay off the principal balance of the loan (the debt that is owed by you), whereas the other part pays off the interest portion (the cost of borrowing). An amortization schedule is a table of periodic loan payments that depicts the parts of installment amounts covering both the portions separately.

While the overall amount of the installment remains same each month (especially under fixed rate mortgage), the portion covering interest and principal keeps on changing. You can use an amortization calculator to see the amount you’re paying towards principal and interest.

In the initial years of a mortgage loan, the majority portion of the installment amount covers the interest portion, whereas a very insignificant portion of the installment covers the principal. 

Therefore, for the first 5-6 years of the loan, the principal balance is hardly paid off. With time, this status quo shifts in the favor of principal payments and later on in the loan cycle the majority amount of an installment covers the balance of the loan.

All Western Mortgage has developed an easy-to-use loan amortization calculator that effectively and accurately depicts the amount you are paying as interest and principal with each mortgage repayment installment. 

All you need to do is enter the amount of your loan, interest rate, and number of months in the calculator and it will show you a breakdown of your mortgage. You can check out this mortgage amortization calculator here.