For many buyers, the homebuying process is an unfamiliar process full of new terms and activities.

Mortgage amortization is one of the first terms that you should familiarize yourself with when you’re trying to secure a mortgage. Though it sounds technical, mortgage amortization is actually a simple concept to grasp.

Mortgage amortization is the process by which a home loan is paid off. Although mortgage repayment schedules are generally structured in equal monthly payments, in the early stages, most of your money is put toward covering interest costs. As you continue paying off the loan, more of your payments go toward the principal.

Although your principal and interest costs are distributed differently throughout the repayment period, your monthly payment total will remain the same throughout the process. By understanding your mortgage amortization schedule, you can decide which type of mortgage best suits your budget.

Understanding how mortgage amortization can help you pay off your loan

One of the first steps toward understanding mortgage amortization is identifying the difference between principal and interest.

Principal is the money you borrow when you take out a loan. For most homebuyers, the simplest way to calculate principal is by subtracting your down payment total from your home’s purchase price. The remainder is your principal. The larger your principal, the more interest you’re typically going to pay.

Interest is the money you pay your lender in exchange for receiving the loan. It’s calculated as an annual percentage rate, or APR.

Understanding mortgage amortization can help you create a strategy to direct additional mortgage payments toward your principal, which will save you money on interest.

How to calculate mortgage amortization

The simplest way to quickly and accurately calculate mortgage amortization is by using an online calculator from a trusted financial institution. The best online calculators allow you to include variables such as local taxes, HOA dues and home insurance costs. By including all these variables, you can calculate exactly how much you’ll pay in interest over the life of the loan. You can adjust the figures to see how much you’d save by making additional payments toward principal.

By reviewing different scenarios through mortgage amortization, you can plan ahead with your budget. Depending on your needs, you may decide that it’s better to have a longer mortgage amortization period, because it will give you more time to pay back the loan and keep monthly payments manageable — though you’ll pay more in interest payments.

Or you might decide to aim for a shorter mortgage amortization period, which will mean higher monthly payments, but you’ll save significantly on interest payments over the life of your loan.

Visualizing mortgage amortization is one of the most important processes of deciding which type of home loan to apply for.

If you need help weighing your options, reach out for assistance. Call 1.800.205.3464 to speak to a First Merchants Bank loan expert today.