If you are interested in buying a home, you will most likely be looking into financing. Not all home loans are created equal, and in some cases, lower interest rates may not always mean the cheapest loan. Here is some information on this type of loan, to help you with understanding mortgage amortization, and how it works.

Mortgage amortization refers to repaying a loan in equal installments. These installments are made over a specified period of time. Although the payments are equal, the ratio between interest and principle varies a great deal over the life of your loan.

In the early years of a home loan, you are paying mostly interest with your installments. For example, you might borrow $100,000 on a thirty year loan at six percent interest. You will make 360 payments of $599.55 each month.

On your first payment, five hundred dollars of it will be interest. In one year, you will be paying about $493 in interest. However, after ten years you are paying about $418 in interest, and after twenty years your interest payment drops to $270. Your final payment has an interest amount of only three dollars. The final payment is almost pure principle.

As you can see, the first ten years or so of your home loan you are not paying off much of the principle. However, you can add a payment to the principle with each monthly payment. Even as little as twenty five dollars can make a difference. Not to mention you can take the mortgage deduction to save on taxes.

If you pay an extra twenty five dollars on each one of your payments, you would pay the loan off three years ahead of time. Three years of house payments comes to $21,584. This is $599 multiplied by 36 months. Twenty five dollars seems like a small amount, but it can add up a great deal. That twenty five dollars over the life of the loan totals only $9,000. The rest of the savings is in interest.

When it comes to understanding mortgage amortization, the length of the loan is extremely important. Here is another example on the same $100,000 home loan. If you pay the regular payment for the entire thirty years, your total interest charges are $115,838. This is the actual cost of your loan, and as you can see, it is more the total amount you borrow.

If you take out a fifteen year home loan for $100,000, the scenario is much different. You may get a slightly lower interest rate, but even if the interest rates are the same, the savings can be substantial. With a six percent loan you have payments of $844, but the total interest paid is only $51,894. This is less than half the interest charge of the thirty year loan.

In summary, understanding mortgage amortization has to do with interest rates and how long the terms are. The longer the terms are, the lower the payments will be. However, you pay a great deal more interest with the longer loans. If you can afford the higher payment, opt for the shorter term loan. You also can make a small principle payment each month, and this can take years off the loan, and save you thousands of dollars.