How would you rate your knowledge of real estate terminology? Most first-time homebuyers have limited knowledge of important real estate terms associated with purchasing a home. Keep reading for a quick overview of the term amortization and learn more about its integral role in the real estate industry today.
What is Amortization?
Many homebuyers in the U.S are unable to pay for a home up front in cash. As such, a majority of homebuyers require a loan. In real estate terminology, this loan is known as a mortgage. The schedule of a homeowners monthly mortgage payments is defined as amortization. This term encompasses the breakdown of which portions of a monthly payment are put towards interest and which are intended for the principal amount. When a homebuyer first receives a loan, they will notice that their monthly payment is applied mostly towards interest on the home. With this, only a small percentage is applied to the principal balance. As the homeowner continues to pay their monthly mortgage payments over time, this portion will decrease and a larger portion of the payment will apply to the remaining balance owed of the property. An amortized loan is entirely paid off when a loan term comes to a close.
Do other types of loans use amortization?
Many types of loans use an amortization schedule detailing payments on a loan. Such load includes auto loans and personal loans that people often receive from banks or third-party lenders.
What are the benefits of amortization?
In most circumstances, both the borrower and the lender benefit from amortizing loan. The borrower primarily benefits from making their payments on time each month, as this prevents both negative impacts against their credit and additional charges. Lenders benefit from receiving a reliable schedule of payments, including principal and interest payments, each month.
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