Understanding Amortization Schedules and How They Impact Mortgage Payments

For anyone in the process of looking for their first home or a new home, the term “amortization schedule” has likely come up a number of times. While it may sound confusing, it is crucial to understand what an amortization schedule is and how it will impact any current or future mortgage. Here is a breakdown on what it is and what it does for a mortgage.

What is an Amortization Schedule?

An amortization schedule outlines the repayment of a mortgage or loan over a set period of time, typically with a table or chart. It will show how monthly payments are divided between the portion repaying the principal of the mortgage (original borrowed amount) and the interest (the cost of borrowing). At the beginning of a mortgage, a larger portion of each payment is typically allocated to paying the interest amounts but this gradually shifts, with more of the payment focusing on the principal balance and lowering the amount still owing. This gradual reduction in principal over time is what creates equity in an asset like a house or a car.

What Impact Does It Have on Payments?

1. The total interest paid over the course of the term or amortization can be determined by reviewing the schedule. This information can help determine whether the transaction is beneficial or whether another opportunity might be worth considering.
2. The schedule shows each payment as well as the allocation of funds from each payment, which can help to create a better understanding for budgeting purposes. 
3. The total time commitment for the payments is outlined in the schedule, which can help with setting goals for financial success. Knowing the payments and dates of payments as well as the principal payments, interest payments and totals can help with making adjustments in the future to either pay down the principal balance faster or extend the loan or mortgage longer. 
4. The amortization schedule also helps determine the value of the equity built up over time. This is helpful if there are plans to refinance or sell the property in the future.

Accessing an Amortization Schedule

The lender should provide an amortization schedule at the beginning of the mortgage. Some lenders have dashboards or other access points for their clients to see the current situation of their mortgage at any time, including access to updated schedules, if required. Online resources are also available outside of lender portals or dashboards, which should produce updated amortization schedules based on the data submitted. Your mortgage broker can do up an estimated amortization schedule while you are planning your home purchase.  These can be helpful to see what payments and equity would look like if lump sum payments are received or if mortgage payments are increased or decreased.  

Understanding the amortization schedule of a mortgage or loan is essential for making informed financial decisions. It provides insights into the allocation of monthly payments, the growth of equity, and the evolution of interest payments over time. With this knowledge, strategic choices can be made to help homeowners pay off their mortgage faster and save on interest costs over the course of the mortgage. Learning more about how mortgages work including amortization, terms, rates and other key information, can help homeowners or prospective homeowners save money and build wealth faster. For more detailed information or to have a conversation about mortgages in Saskatchewan, reach out to us at iSask Mortgages. We are happy to help.