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AMORTIZATION

car loan debt loans mortgage wednesday word of the week Jul 14, 2021

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Definition


Amortization is the gradual reduction of a debt over a given period.

Why It's Important

This is how you can figure out how much you are really spending over the course of a loan.  It also shows how much of your payment is actually going towards principal and what’s being wasted on interest.  Honestly, it’s best to just use a calculator vs trying to calculate everything by hand.  

An amortization calculator will amortize (show the reduction) your debt (such as a mortgage) and display your payment breakdown of interest paid, principal paid, and loan balance over the life of the loan.  

It comes as a surprise to some that most of your initial payments on a loan are used to pay interest.  For example, in a 30-year mortgage over 83% of your payments are used to pay down interest in the first year, while only 3% of your payments are used to pay down interest in the final year.  This is the primary reason why little equity is built in the first few years of a mortgage and it’s best to hold a house long term.

Credit Karma has a good one you can check out here!

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