Understanding The Amortization Process in Michigan
Many Michigan residents have undergone the amortization process during a certain point in their lives; a lot of us just do not realize that the term for it is amortization! What is this funny little word? In simple terms, it just means paying off a loan over a certain amount of time. The term amortization is pretty all encompassing. It does not just refer to mortgages and home loans. It can be used to refer to all sorts of loans, including credit card bills, car loans, and more. The amortization process determines how much you have to pay on each payment over a set amount of time. Generally, amortization is calculated by the amount of the loan, the time period you are given to pay it back, the amount you have to pay each time, as well as the rate of interest.
Confused? Let us look at an example. Let us say that you bought a house in Kalamazoo for $150,000. For that, you have to pay a $20,000 deposit. Your home loan thus amounts to $130,000. Let us say that you found a lender willing to give you the loan over a period of thirty years with a yearly interest rate of seven percent. That mean, in order to find out how much the monthly payment would be, we first have to divide the principle loan amount ($130,000) over the time period in months. So thirty times twelve would make that period 360 months. Then there is the annual interest rate of seven percent. Put it all together, and you get a monthly payment amount of about $870.
Apart from calculating the monthly payments, when it comes to amortization loans, the interest payment is deducted first, with your loan following. That does not mean, however, that the first payment is totally used to pay interest. It only pays parts of it.
Let’s go back to our earlier example – the $870 monthly payment. Around $760 of that mortgage payment is going to be used to pay off interest. The remaining $110 will be used to pay off your principle loan. For each of the following months’ payments, the amount of interest that is paid is reduced. As you get closer to the thirty year period, the amount of interest paid is minimized, as the main part of your monthly payment goes towards repaying the principal.
So now it is clear. For each new loan you decide to take out, the early monthly payments are going to be used to pay off the interest and only a tiny portion will be going towards repaying your original loan.
Yes, it is true, amortization can be quite a difficult issue. The vast majority of people would never know how to calculate the interest or the amount that goes towards repaying the principal loan each month. Thankfully, there are quite a few free amortization calculators available on the world wide web. Use them to calculate how much your monthly payment will be before you decide which loan you want to take. Your lender should also be able to provide you with these facts when you take out an amortization loan.
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