Amortization is used in mortgages and it is used in relation to loan payment. The changes to the balance of the loan principal over a fixed period are called amortization. An informed borrower should know the difference between amortization and depreciation. The line between the two is the nature of financial events that take place.
Depreciation is the loss of value of an asset over time and mortgage amortization on the other hand is the reduction of principal of a loan over a given time and the given interest rate. There is a fixed amount that one pays monthly: a portion settles the loan principal while the remaining settles the loan debt.
Benefits of mortgage amortization
Amortization enables the borrower to have a clear set of monthly payments. The borrower has a certainty of how much he or she is required to pay at the end of the month make it easier for them to track.
With amortization, borrowers are exposed to different amortization schedule each with a different amortization schedule calculator which allow flexibility depending on one’s financial power. These flexible interest rates have an extra benefit to the borrower. The interests can be changed at some point or they may be fixed for the life of the loan; it all depends with the agreement between the lender and the borrower.
Amortization also enables you to pay less interest over the remaining amount the principle. As the balance decreases, the amount of interest also decreases so you will be paying less and less as time goes by.
Cons of mortgage amortization
For you to able to reduce the interest cost, you will have to make larger down payments, tis can be a challenge to many borrowers who don’t have enough financial sources. This makes many borrowers to end up paying high interest and carry the burden of the loan for longer time.