Most of us have done this at some point in our lives, but most of us don't know it's called "amortisation." In its simplest form, amortisation means paying off your loan over time. Amortization is a pretty general term that isn't just used for mortgages or home loans. It can be used to talk about your credit card bills, car loan, etc.
Most of the time, amortisation means figuring out how much you have to pay for each payment over a certain amount of time. It is usually based on the amount of the loan, how long you have to pay it back, how much you pay each month, and the interest rate.
This point would be better shown with an example.
Say you bought a house for $150,000 and paid a $20,000 down payment. So you are left with a $130,000 home loan. Let's say you found a lender who is willing to give you a loan for 30 years with a 7 percent annual interest rate.
So, how much would you pay each month?
First, we divide the loan amount, which is $130,000, by the number of months it will be paid back. That's 30 times 12 months, which is 360 months. You also need to think about the interest rate, which is 7%. When you add everything up, the payment would be around $870.00 per month.
When figuring out the monthly payments for an amortisation loan, the interest payment is taken out first, then the loan amount. But that doesn't mean that the whole first payment goes toward interest. Only a part of it does.
Continuing with our last example, the monthly payment of $870 is a good example. About $760 will go toward paying off interest, and the rest, $110, will go toward paying off the main loan amount. With each monthly payment after the first, the amount of interest paid goes down. As time went on and you got closer to the 30-year mark, you would pay less interest and most of your monthly payment would go toward paying off the principal loan.
As you can see, most of the early monthly payments you make on a new loan will go toward paying off the interest. Only a small amount will go toward paying off the loan itself.
As you can see, amortisation is not an easy subject. Most people would never be able to figure out how much interest they pay and how much goes toward paying back the loan each month. There are a lot of free amortisation calculators on the internet, which is good news. Before you decide which loan to get, you can use them to figure out how much your monthly payment will be. When you get an amortisation loan, your lender will also tell you these things.
