When you buy a home, whether it’s a home for sale in Uptown Charlotte, a single-family home for sale in Mint Hill, or even a condo in another area such as South Park or Ballantyne, you’re most likely going to need a mortgage loan. If that’s the case, you’re going to have to understand amortization.
What is Amortization?
Amortization is an accounting term that refers to what happens when you pay off a debt over time. In the case of a mortgage, part of each payment goes toward interest; the other part goes toward reducing the balance of your loan (the principal).
How Does Amortization Work?
When you pay back a mortgage loan, particularly during the first few years, most of your monthly payment goes toward interest. The lender wants to be compensated for giving you such a large sum of money, so in a way, that makes sense.
As you pay off more interest over time, you’ll also start chiseling away at the principal—the amount of money actually used to purchase the home.
An amortized loan is designed so that your very last mortgage payment completely pays off your loan balance.
Home loans typically “live” for 30 years, although you can get a 15-year or 20-year mortgage if you’re so inclined. Even though most people don’t keep the same loan for 30 years (they often sell the house or refinance), these loans are put together as if you’d keep them for their entire term.
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