The amortization period is the length of time it will take a borrower to completely repay their mortgage loan. Typically, the shorter the amortization period, the lower the interest rate.
Common mortgage amortization periods are 15 years and 30 years. Let’s say you borrow $200,000 to buy a home. You will have to pay back that $200,000, the principal, plus interest over a 30 year period. You will make 360 monthly mortgage payments. When you make your mortgage payment every month, a portion will go to interest and remainder will go to principal.
An Amortization Period Example
At a 4% interest rate, your monthly principal and interest payment will be $955. Every month part of the $955 goes towards interest and rest pays down your mortgage balance.
In the first month, you will pay $667 in interest ($200,000 X 4% Annual Interest / 12 Months). The rest, $288, will go to pay down your loan amount. Your new loan amount will be $199,812 ($200,000 – $288).
In the second month, your mortgage payment will be the same, $955, but your amounts that go to interest an principal will shift. For every month that goes by, you will pay a little more towards principal and a little less towards interest.
Equity
As you pay down your principal, the equity in your home grows. Your equity, is the value of your home minus the amount of you owe on your mortgage.
Your payment will be larger if you choose to pay your mortgage back over a 15 year period instead of a 30 year period because you only have half the time to pay it back. You will also pay lower total interest over the life of your mortgage loan.
Read more on monthly mortgage mortgage payments here.
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