Mastering Mortgage Amortization: A Comprehensive Guide

What is Mortgage Amortization?

Mortgage amortization is the process of paying off a debt over time through regular payments. A portion of each payment is for interest while the remaining amount is applied towards the principal balance.

The percentage of interest versus principal in each payment is determined by an amortization schedule.

Key Components

• Principal: The amount of money you borrowed.
• Interest: The cost of borrowing that money.
• Term: The amount of time you have to repay the loan.

The French System vs. The German System

The French System (Annuity)

This is the most common system in many countries, including France and the US (for fixed-rate mortgages).

• Payment: Constant monthly payment.
• Structure: High interest portion at the start, high principal portion at the end.
• Pro: Predictable budgeting.

The German System (Constant Amortization)

• Payment: Decreases over time.
• Structure: Constant principal payment, decreasing interest payment.
• Pro: Lower total interest paid over the life of the loan.

3 Strategies to Pay Off Your Mortgage Faster

1. Bi-weekly Payments: Making payments every two weeks instead of monthly results in one extra full payment per year.
2. Round Up: Rounding up your payments to the nearest hundred can significantly reduce your principal.
3. Refinance: If interest rates drop, refinancing to a shorter term can save you thousands.

Conclusion

Understanding how your mortgage amortizes is the first step to financial freedom. Use our calculator to see how extra payments can affect your specific loan scenario.