Do You Understand How Loan Amortization Impacts Your Debt?

The financial world is full of terms that most people do not understand, for the simple reason that they have never heard them before. Loan Amortization is almost certainly very high on the list of misunderstood ideas. Hopefully we can help you with this and many other misunderstandings, if you are left with any questions after reading this short article you should contact us at Nick@nwmortgageexperts.com or call us at 206-303-8526 and let our professional loan officer, Nick , clarify any remaining confusion you have about Loan Amortization or any other mortgage related topics, and if you are considering borrowing yourself, Nick will help you find the right loan for you.

Loan amortization, is, at a very basic level, the breaking up of a large debt into smaller payments over a period of time. The length of time for repayment and the size of repayments are determined by a large number of factors including the size of the debt, the amount of assets you have when you take out the loan, and the income that you have. These factors are weighed together and the payment plan that is arrived at is called the loan amortization schedule. There are many types of loan amortization schedules and the right one for your loan will depend on the factors above. A flat repayment rate over 30 years is the most common loan amortization plan and among the most popular.

So why have loan amortization at all you might ask? Well, the basic idea is two fold, small regular payment over time are a better bet for lenders because they are more likely to get at least some of their money back than they are if they depend on a single large payment. The other main reason for loan amortization is that it actually results in a lower over all payment for the borrower. The reason for that is this; if you are regularly paying off the interest on your loan as you go along you are preventing the principal amount owed from growing, this is important because if the principal amount owed were to grow you would be paying interest on more money. I know this may seem a little complicated so I will try to give you an easy loan amortization example:

Say you borrow $100,000 at an interest rate of 5% per year. That means that the first year you are going to owe an extra $5,000 in interest for a total of $105,000, now if you make a payment of at least $5,000 your total debt will not grow larger, and the next year you will owe no more than another $5,000 in interest or less if you paid enough to lower your total debt below 100,000. On the other hand, if you do not pay at least 5,000 that means your principal will grow larger, and the next year you will owe interest on the entire amount. So say in that same example that after the first year you did not make any payment and the total you now owe is $105,000 the next year you are going to owe 5% on that total amount or another $5,250. So after only one year of not paying interest you already owe an extra $250. And every year that is only going to grow larger.

I hope this was helpful in understanding loan amortization, but if you are still confused contact us at Nick@nwmortgageexperts.com or call at 206-303-8526 and not only can we answer your questions, we can help you determine exactly what the right loan is for you.