Amortization

Amortization is the term used to describe the payment schedule of a loan that a person takes and is most commonly used in mortgage payments. What amortization means is that one has taken out a mortgage and in each installment that they will pay back; they will be paying a part of the principal amount and a part of the interest to the mortgage company. This is known as an amortization schedule. In the initial payments the major component of an installment payment goes to the interest that has to be paid and a lesser portion towards payment of the principal amount that one has taken. Some where in the mid of the installments the interest portion and the principal amount being repaid even out and after that the interest portion starts to decline and the principal portion increases. So at the end of the term or when the last installment has been paid the principal amount that has been paid back is zero. In mortgaging the payment schedule for a mortgage is also called a mortgage amortization table. There is a formula that is used to calculate amortization and is called a mortgage amortization table calculator. The formula for calculating amortization is:

MP = ______PMT________
1 – (1+ i) - n
MP = Monthly Payment Amount
PMT = Principal amount of the mortgage loan
i = periodic interest rate

n = total number of payments (for a 20 year loan with monthly payments, n = 20 years x 12 months = 240).

This formula maybe difficult for some people to calculate however there are mortgage amortization software freely available on the Internet that one can use to do a calculation. Mortgage amortization table and mortgage amortization calculator loan calculators and mortgage amortization software are also easily found on the net. If one intends to take a mortgage one can take the amount that they intend to take in a mortgage loan and the interest rate and get a mortgage amortization chart. This chart will show them the installment payments that they have to make and what portion of the payment will be going towards payment of interest and what towards the principal. Following this table one can tell at any point in their repayments how much principal and how much interest they owe towards the mortgage company.
All mortgage companies and financial companies use amortization to work out the repayments of a debt. The reason for using amortization is that the greater the sum of the principal that is outstanding the higher interest can be charged. If the principal amount repayment is greater then the interest portion then over a period of repayments the interest earnings would decline.

There is another term in mortgage amortization which is called ‘negative amortization’. This should not be confused with a reverse mortgage as they are two different things. A negative amortization is also referred to as GPM or graduated payment method. In a negative amortization the borrower pays a lesser amount of the interest that he or she has to pay in each installment and after a certain period the interest owed is added to the installments. Some people take a negative amortization mortgage as they expect their income to increase after a certain period and then they can afford to pay a higher installment. There is an amortization schedule for balloon mortgage. A balloon mortgage is when after a fixed period a large payment becomes due. That is the entire principal amount may become due after a period of 10 years.

All financial lending institutions and mortgage companies use mortgage amortization tables and mortgage amortization schedules to work out the repayments for any mortgage loan that they are going to give to a client. There are other accounting methods that are used in working out debt repayment schedules but amortization is the method that is used in the mortgage business by the mortgage companies to work out a payment schedule for mortgage loans.