When
we obtain a mortgage on real property lenders use
a method of interest calculation called amortization.
Definitively, amortization
is: The periodic principal pay down of a loan.
An
amortized loan is defined as: A
loan to be repaid, interest and principal, by a series
of regular payments that are equal or nearly
equal, without any special balloon payment to
maturity.
This
simply means that the monthly payment that you pay
on your loan is comprised of both principal (the
actual money you borrowed)
and interest (the amount the lender charges you to
borrow the money).
When
a loan is amortized the majority of monthly
payments go toward the repayment of the lenders
interest, which is compounded daily
on the remaining principal. As a matter of fact in the
first 5-10 years of a loan, less than 3% of the
monthly payment goes toward
the repayment of the principal!
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