When you get a mortgage from a lender, all the details and terms of the mortgage are contained in the document. One of the items in it is going to be an amortization chart, which reveals the details of how much has been paid and how much is still owed at any point while you still owe on the mortgage.
The Amortization Chart Shows All Payments and Balances
Every amortization chart will have a number of rows and columns. There will be an entry for every month during the length of the loan, which in most cases, is going to be 30 years. This means that there will be information for each of the 360 payments to be made on a 30-year mortgage.
On a fixed rate mortgage, the amortization chart will have set payments that will be constant through the life of the mortgage. Looking at the “Interest” column, you will notice that the amount paid each month toward interest slowly decreases each month. Because the interest is based on the principal which slowly decreases as payments continue to be paid, the interest also becomes smaller each month. The interest is always taken out first from each payment.
The column labeled “Principal” shows how much of each payment goes toward reducing the principal. This number should be slightly increasing with each payment made. As long as payments are faithfully made each month, both the interest and the principal will continue to drop until the 360th payment is made – which will then eliminate the debt completely.
When Payments Are Not Made Faithfully
If a payment should be missed, or late, more interest is added. This increases the balance owed, which means that you are now paying even more interest. Unless payments are brought up to date, this can add considerable more cost to the mortgage, because, according to Amortization.com, you are now paying interest on interest. You have now entered into negative amortization, which simply means your debt is increasing instead of being reduced.
The Advantage of Making Extra Payments
When you make extra payments on your mortgage, says Investopedia.com, this reduces the principal faster, which, in turn will also reduce the amount of interest you need to pay. One-hundred percent of an extra payment goes toward reducing the principal. Ultimately, making extra payments will enable you to pay off the debt faster and will also help you to build equity faster, too.
When you do make extra payments, it will throw off your amortization chart in your mortgage documents. You will need to recalculate it in order to have a new accurate chart. If you intend to make regular extra payments of equal amounts, your lender can prepare a new chart for you. If you want to make irregular payments, or experiment with seeing how fast you can pay off your mortgage, you can use an online amortization calculator, such as the one at Bankrate.com, or at Interest.com.
Using an amortization chart can help you see how fast you can reduce your overall debt. Making extra payments can greatly reduce your mortgage debt, and help you save money in interest.