Amortization

This is an important word used in Real estate so you will need to learn it so you can better speak the language of Real Estate investing.

Amortization refers to the math involved in figuring out the payments on a loan. Not only the total amount but also the portion charged for interest on the loan and the principle borrowed. For instance, on a fixed rate loan your payment will stay the same throughout the term but the amount going to interest or principle will change monthly.

When buying a home the mortgage will say something like, “the loan is amortized over 15 years”. Simply means its going to take you 15 years to pay it off. An ‘Amortization Schedule’ is simply a printout of every payment with the breakdown between interest and principle. The length of the loan will determine the amount of interest you will pay along with the interest rate.

The default terms for owner occupied home loans in the U.S. is 15 or 30 years. Additionally, the default is that there is no prepayment penalty on these loans so you can usually pay them early. Commercial loans are a whole different animal and you can see many different terms. Less common nowadays are balloon payment loans or adjustable rate loans.

Its that simple, now you know the meaning behind “amortization”.



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