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Amortization In Real Estate: A Complete Guide And Definition

Carla Ayers3-minute read

August 25, 2021

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What Is Amortization In Real Estate?

Amortization is a way to pay off debt in equal installments that include varying amounts of interest and principal payments over the life of the loan. An amortization schedule is a fixed table that shows how much of your monthly payment goes toward interest and principal each month for the full term of the loan. Let’s go over a few key terms.

Fully Amortized Loans

A fully amortized payment is one where, if you make every payment according to the original schedule on your term loan, your loan will be fully paid off by the end of the term.

Positive Amortization

Lenders typically require a borrower to repay part of the principal with each loan payment to reduce their repayment risk. This results in the loan balance decreasing with each payment. This is called positive amortization.

Negative Amortization

Negative amortization is when a borrower is making the required payments on a loan but the amount they owe continues to rise because the minimum payment doesn’t cover the cost of interest.

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How Does Amortization Work In Real Estate?

Fixed-Rate Mortgages

A fixed-rate mortgage is a great option for those who plan to stay in their home for a while. These types of loans have a fixed interest rate throughout the duration of the loan. The amount a borrower pays may fluctuate based on local tax and insurance rates, but for budgeting purposes, fixed-rate mortgages provide a predictable monthly payment.

At the beginning of a fixed-rate mortgage, more of the monthly payment is applied to the interest. Over time, that changes and more of the monthly payment is applied to the principal as the interest balance decreases.

Adjustable-Rate Mortgages (ARMs)

Most adjustable-rate mortgages (ARM) have an introductory period between 5 and 7 years where the borrower pays a fixed interest rate that is usually lower than the market rate. Once the introductory period is over the lender will then look at a predetermined index to determine the appropriate rate for the borrower.

If the market interest rates have increased, the borrower may see an increase. If the market rates have decreased, the borrower could see a decrease in their interest rate. ARMs have a cap for the highest and lowest interest rate your loan can incur.

Interest-Only Mortgage

Interest-only mortgages can be an appealing loan type for those who want to buy a home and keep the monthly payments low. With a 30-year interest-only loan, the borrower may only pay interest during the first introductory 10 years. After that, principal and interest payments would be made for the remaining 20 years of the loan term.

Balloon Mortgages

A balloon mortgage is any financing that includes a lump sum payment schedule at any point in the term. Balloon loans can be structured many ways. During the introductory period they can be interest-only payments, like discussed above. Many balloon mortgages include principal and interest in monthly payments, but the borrower must always be prepared to deal with the lump sum payment, usually at the end of the term of the loan.

Example Of A Real Estate Amortization Chart Or Table

MONTH

PAYMENT

INTEREST

PRINCIPAL

BALANCE

 

 

 

 

 $      200,000.00

1

 $         954.83

 $        666.67

 $          288.16

 $      199,711.84

2

 $         954.83

 $        665.71

 $          289.12

 $      199,422.71

3

 $         954.83

 $        664.74

 $          290.09

 $      199,132.62

4

 $         954.83

 $        663.78

 $          291.06

 $      198,841.57

5

 $         954.83

 $        662.81

 $          292.03

 $      198,549.54

6

 $         954.83

 $        661.83

 $          293.00

 $      198,256.54

7

 $         954.83

 $        660.86

 $          293.98

 $      197,962.57

8

 $         954.83

 $        659.88

 $          294.96

 $      197,667.61

9

 $         954.83

 $        658.89

 $          295.94

 $      197,371.67

10

 $         954.83

 $        657.91

 $          296.93

 $      197,074.75

351

 $         954.83

 $          31.25

 $          923.58

 $          8,451.98

352

 $         954.83

 $          28.17

 $          926.66

 $          7,525.33

353

 $         954.83

 $          25.08

 $          929.75

 $          6,595.58

354

 $         954.83

 $          21.99

 $          932.85

 $          5,662.74

355

 $         954.83

 $          18.88

 $          935.95

 $          4,726.78

356

 $         954.83

 $          15.76

 $          939.07

 $          3,787.71

357

 $         954.83

 $          12.63

 $          942.20

 $          2,845.50

358

 $         954.83

 $             9.49

 $          945.35

 $          1,900.16

359

 $         954.83

 $             6.33

 $          948.50

 $              951.66

360

 $         954.83

 $             3.17

 $          951.66

 $                       -  

The Bottom Line

Understanding how amortization works can give you great insight to the mortgage type that will work best for you and your family. Owning a home is one of the largest purchases most American will make, make the most of your investment. When you’re ready, apply online with Rocket Mortgage®.

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Carla Ayers

Carla is a freelance writer and Realtor with a background in marketing, communications and property management. She attended Eastern Michigan University where she received a Bachelors in Arts Marketing and a Masters in Integrated Marketing & Communications.