Okay, in an effort to keep my head from exploding in light of all the economic data over the recent x months, I am getting back to some basics, that hopefully some of you will appreciate.

Lets talk First-time home buyers and the questions they might have. A big one I get is:

What does amortization mean?

Basically, amortization (pronounced: am-ohr-tih-ZAY-shun) is the scheduled pathway by which a loan’s principal balance is paid down to $0. I think Amort is latin for “to bring death to”… I remember hearing that somewhere…

Contrast that to an interest only loan in which you are [Einstein here] only paying the interest and are in no way retiring the debt through required repayment of principal.

With respect to FHA mortgages and conventional mortgages alike, amortization is what determines how much of a monthly payment goes to principal, and how much goes to interest. I have found that even the formula in excel is kinda tough, but if you are looking for a mortgage calculator, I have one that will show you the whole amortization table so you can see month to month how much of your payment is going to principle… kinda scary actually. LOL
That being said, amortization schedules are the same for all fixed rate, non-interest only Orlando home loans including 15- and 30-year fixed rate mortgages, as well as all non-interest only ARMs.

Monthly principal and interest payments on a mortgage are based on the mathematical formula above, where:

• P = principal
• A = payment
• r = monthly interest rate
• n = number of payments

It is surprising to some that the relationship between principle repayment and interest is not a linear relationship each month… others are quite aware that payments are heavily weighted with interest on the front end.

In other words, in the early years of your Orlando home loan, the interest due on a mortgage is relatively high versus the principal due. Have you ever heard someone say, “You don’t pay down much of a loan in the first few years anyway…” this is why… it is just math.

This interest-heavy mortgage repayment schedule helps banks to collect as much loan interest as possible up-front, offsetting potential loan losses. [Huh, banks get loan defaults? Who saw that coming?] While the amortization schedule may not seem real fair, it is a backbone of our economy that banks can recoup this money this way and you are likely the benefactor of that in ways the neither you nor I could ever quantify… and yes, this is still the case even in light of the recent past! =0)

“But, can I stick it to the man?”

In a manner of speaking, yes. Just because the bank sets an amortization schedule doesn’t mean that a homeowner can’t change it. In any given month, a borrower can prepay extra principal to the lender, thereby changing the formula and accelerated the loan payoff date. This brings us to the exchange of:

Can I?

Yes.

Should I?

Well, that is a bit more complicated…

Is it a prudent way to allocate your hard earned dollars? I would make the argument that it is not… and NO, this isn’t to ‘protect the man’ LOL. Those that know me would understand what that is humorous. It becomes more a question of equity management… a topic for another post. but that is a whole other post on Equity Management. Briefly though, there are other ways to pad your own circumstances better than by pre-paying principle on a mortgage.

There are online calculators that do the prepayment math for you, but before making extra payments, talk with your loan officer or financial advisor first. Prepaying your mortgage could trigger a stiff penalty from your lender, or put your liquid assets at risk. Prepayment is not a bad plan, but it may be a bad plan for some.

(Image courtesy: Mortgage News Daily)