What Does Mortgage Amortization Mean to the Average Homeowner?
What is a Mortgage?
Mortgage is the term used for when someone holds the ownership of a property for a buyer of that property, in return for giving the buyer the money to buy the property. A standard mortgage lender will lend a buyer 80 percent of the property's value for its purchase. Once the buyer pays the mortgage in full, the property officially becomes his. Until this point, if the buyer defaults on the mortgage, the lender, who is usually a bank, takes irrevocable ownership of the property.
What is Amortization?
Amortization occurs as the lender is being paid. As the amount of money owed to the lender decreases, this is the amount that mortgage amortizes. If a mortgage were an interest only mortgage, no amortization would occur. In this case, the principal would never decrease and in order to own the property the buyer would have to pay the lender a lump sum for the full value of the property.
What is Equity?
Whether or not to a mortgage is amortizing. Equity could be increasing the property's value. This could happen, simply because the price of real estate is rising, or because the buyer has made improvements to the property.
The property buyer's equity could also be increasing because the mortgage is amortizing. When the buyer's equity increases for whatever reason, the equity belongs to the buyer not the mortgage holder. Therefore, if the buyer then turns around and sells the property, he may receive more money than his purchase price and therefore he would have a profit to keep after he pays the mortgage holder the amount of money he owes the lender.
What Are Interest Payments?
Interest is paid to the lender in return for the time during which the borrower uses the lender's money. As the mortgage holder receives principal payments he is also receiving interest payments. Since the interest payment represents the time of value of money, the buyer of the property receives nothing tangible in return for the payment of this interest.
Before a purchaser mortgages a property for its purchase, he may examine the amortization schedule, chart or table to see exactly how the mortgage will amortize. This will tell him how much interest he will be paying over different periods of time. He can then calculated the amount of equity the property will gain and gage this against how much he will have lost by paying interest on the mortgage.
Who is Most Concerned With Mortgage Amortization?
A mortgage amortization schedule is most important for real estate investors. For homebuyers however, it is not as important because it is generally accepted that buying a home is a propitious move. Being overly concerned with how the property amortizes is not of utmost importance to him.
Living in a home the buyer has purchased, has far greater benefits than living in a home he is renting. So, someone who is buying a home for the purpose of it being his main living quarters, should just look for a property he would like to make his home, make sure the mortgage isn't structured so the payment will rise steeply at some point and then, buy it.