On The Verge Of Sounding Like An Idiot...
Is there an easy way to understand amortization? Yeah, im a newb and came accross a woman who sellling her house she owns outright, id like to talk to her about owner financing. I look at the tables and understand the numbers I just dont get the how or whys. My apologies if this vague, just looking for some help. Thx
Amortization:
A breif breakdown in example.
You buy a house with a 30 year mortgage. Each month you make a payment.
Part of the payment is principal.
The largest part of the payment is interest.
E.g. you purchase a house for 100K at 6.75% interest.
The payment is $648.60 of that, $86.10 is for principal, $562.50 is for interest.
See: http://www.interest.com/hugh/calc/mort.html
Over the thirty year period, your interest payments decrease and your principal payments increase.
Hope that explains.
Good Luck,
Clint
Excel has an excellent payment function. If you don't use excel I would strongly recommend learning as much as you can about it. As far as how an amortization table works, here's my two cents.
As Clint said, the biggest part of your payment is interest, at least at the beginning of the loan.
Here's how it works. 6.75% interest, 30 years, principal is 100k, and as said payment is $648.60. Your first payment, there is 100k in principal outstanding, so yo take 1/12 of your interest rate (assuming payments are monthly), and multiply that by your principal.
1/12*.0675*100,000=562.50
So, the remaining amount, 86.10, is prinicpal. The next month, the outstanding principal is 99,913.90 (100,000.00 - 86.10) So the amount of payment allocable to interest in month 2 is:
1/12*.0675*99,913.90=562.02
As you keep making payments, the interest amount will decrease, slowly at first, quicker at the end, and your principal amount will increase, slowly at first, quicker at the end.
Hope this helps you understand.