Amortization is a term that you don’t hear all that often but it is something we have all done at one point of a lives or another. In fact many people are doing it right now. Amortization is when you periodically pay off a loan. This could be anything from a car, goods or furniture. Paying a mortgage on your own home is a form of amortization and interestingly enough they both have ‘mort’ within them (a‘mort’ization and ‘mort’gage) which means to kill – which fits perfectly for these terms as it is exactly what you are doing. You are paying off your loan until it has been eliminated – killed, dead, no more or however else you want to put it.

The process of amortization is an easy one to understand once you know the basics and get the idea of how it all works. It is the process of paying off your loan through a set number of periodical payments. A typical payment is calculated by the whole of your loan or principle, the amount of months/payments you have to pay it back and the interest rate.

So for example if you bought a home worth $150,000 and you put down $20,000 deposit you are left with your principle of $130,000. You will need to get a loan for this amount and pay this bacl monthly over 30 years with the interest rate of 7%

So you would work out your monthly payments like this:

Divide your principle (the amount of your loan) which is $130,000 with how long you have to pay it off. In this case it would be 30 years or 360 months, and then you add your interest of 7% to your monthly payments. This ends up to be around $865.00. This would be your monthly payments.

Another thing you should know with amortization loans is that you pay off the interest first then whatever is left comes off your principle loan. But understand, this isn’t an interest only loan, as you do pay off parts of your principle in the same payment. For instance with your first repayment of $865.00, approximately $758.00 of that will be interest and $107.00 will be coming off your loan amount. This will take your loan to $129,893.00, but as your loan payments go on your amount of interest in each payment will go down. The amount you are paying off of the actual principle will go up. For another example your two hundredth payments will be like this, your interest out of the $865.00 will be about $526.00 and the amount coming off of your actual loan will be $339.00. This will bring your loan down to $89,806.00. Can you see the difference from your first repayment?

As you continue to pay your repayments, your principle amount will be outweighing the interest amount to look something like this: When you make that 300th payment of $865.00, the interest amount will be $258.00 and the amount coming off your loan will be $607.00 taking the total of your loan to $43,682.00. With your second to last payment your interest amount out of the monthly repayment will have dramatically dropped to $10.00 while your principle payment would have risen to $855.00

As you can quite clearly see the significance of each payment greatly changes as you get further and further on in your repayments. You start out paying mostly interest and in the end the majority of the monthly payment goes toward cutting down your initial loan amount.

Amortization is a delicate process of numbers which would take quite some time to figure out on your own so luckily there are many amortization calculators free to use on the internet. Use these to help you work out your monthly cost on a loan before you decide that this type of loan is for you. This will help you to know if it will fit into your budget smoothly or not. When going for loans many times there will be an accountant who will work all of these figures out precisely for you and some even give you a table so you know exactly where your money is going each month and whether it is off of interest or your actual loan.

Your mortgage off early

One niggling question that perhaps gnaws at everyone’s peace of mind at some point of time or other is: Should you pay off your home loan or invest the money? You’ll be amazed by the variety of answers this question can elicit, and from this alone you can realize that there’s no one answer for everyone. Though theoretically, the concept is simple: If you think of extra mortgage payments as an investment and your return as the interest on the loan, you need to now consider if you can get higher returns elsewhere? “Yes?” Then, keep the mortgage and invest the money securely.

Having said that, it’s a matter that requires great thought whether you should pay off your mortgage payments or carry them for longer. It depends on several factors such as your tax bracket, how your cash-flow picture looks and what you think about carrying a big loan on your head. Your decision really depends on your mental make-up and your situation in life.

For instance, if you are at the peak of your career, you should hold on to your mortgage. No, don’t consider paying off an early mortgage just yet. If you are in the high income bracket, it means higher income tax too. The good news is that your mortgage interest is just one more income tax deduction you can claim to pay a lower tax. This is the happy side to your loan and you never realized it, did you?

Now, you can even get the most out of your mortgage-interest deduction if you pay off the greater part of your interest early on in your loan term. You can do this by paying one or two more installments during the year. Now to balance your budget, take care to save for a rainy day, for your children’s education, etc.

If mortgage rates are low, invest your money in schemes that give you better returns. But when mortgage rates are higher, invest it in to your home since this guarantees you a higher rate of interest. If for example, you have a 14% mortgage, you can get a 14% rate of interest if you pay it off. Then, before you know it, you will be loan-free.

If you are reaching retirement age, you perhaps want to expedite the repayment of your loans so that you are debt-free when you hang up your boots. Ensure that paying off your mortgage payments in a rush doesn’t actually become counter-productive.

So suppose you decide to refinance your mortgage so that your term is shortened to 15 years and you have a zero balance on your home loan by the time you’re 65 years old. Due to this, your principal and interest payment stand at $950 a month instead of $750 a month. When you reach pay-off day, you can now invest that $950 in a fund that gives you 9% interest. Give yourself another 15 years and you’ll have a tidy sum of $360,000.

Now let us suppose you’ve been retired for a few years now. Considering this, you’re sure to have been paying off more principal than mortgage interest. If this is so, paying off the mortgage loan becomes your prime interest in life, besides also proving to be a cash flow problem. If you know that post-retirement your cash flow will be largely restricted, it would be wiser for you to concentrate on paying off your mortgage. But if you have a few assets or none, it might be a better idea for you to diversify your investments. You could consider saving in either a savings or money market account which would give you healthier returns than the interest you are paying out on your mortgage.

If you’ve just sold a big house and are cash-rich, taking out a mortgage makes complete sense, just so long as your investment returns are larger than your mortgage interest. If you don’t tie up all your cash in real estate, you can take full advantage of tax deduction, invest in other schemes and have greater liquidity at your command. Not only will your loan be paid off, but you will have peace of mind in your sunset years.

3 Mortgage Loan Options

When it comes to home loans there are plenty of options to choose from and it can be hard to determine which one can be right for you. Let’s have a look at the three main types of mortgage loans there are available and what they have to offer to help find one that will suit your needs.

1. The first and most popular form of mortgage loan is the fixed mortgage loan:

30 year fixed rate: this loan is the most commonly used loan today as it offers the low monthly repayments and is the best option for home owners who want to stay in their house for a long time. Advantage – you have more cash in your pocket each month. Disadvantage – you pay more for the loan in the end compared to shorter loans.

15 year fixed rate: this loan allows you to pay your home off in 15 years, most likely before your children finish school or before your retirement. You save in the long run. Advantage – you pay half the interest of a 30 year loan. Disadvantage – you have to pay higher monthly repayments.

Biweekly loan: this loan is usually done on a 30 year fixed rate plan but by paying every fortnight you add in extra payments every year and usually have your loan paid off in about 23 years. This loan also builds your equity in your home a lot faster. Advantage – you pay your home off faster and pay less interest. Disadvantage – you have to pay every two weeks.

Adjustable rate mortgage or (ARM): this loan is great because it works on interest rates and they usually start off with a lower interest rate than a fixed rate home loan. This leaves you paying less each month but leaves you at risk of paying a higher interest if the rates go up.

Advantage – when your interest drops so does your repayment. Disadvantage – if your interest rate rises so does your repayment.

2. Next of the mortgage loan options is the convertible loans:

Hybrid and convertible ARM: there are two types of loans with this one. One is an ARM that you can convert to a fixed rate or a fixed rate home loan that you can covert to an ARM. These options give you the flexibility to change your mortgage loan after a few years. Advantage – having the ability to change between ARM and fixed rate. Disadvantage – if interest rates are high you might not wish to convert.

Interest Only Loan: this loan is good for people who work on commission or get big bonuses so they only pay the interest on their loan and when they get their bulk income they can put it towards paying off the actual loan. Advantages – you are able to get a bigger loan amount. Disadvantage – you have to pay in lump sums and when only paying interest you aren’t paying any thing off on your house.

Balloon loan: this loan is a fixed rate loan with small monthly repayments that usually last about 7 years, at the end of that time you must pay the loan in one big lump sum or have the option to refinance. Advantage – great for people who will want to sell their house before balloon payment is due and low interest rates. Disadvantage – you have to pay lump sum at end of the loan or refinance at usually a higher interest rate.

Reserve mortgage loan: this loan is designed for equity rich seniors. It requires no monthly repayments. Advantage – more money in your pocket. Disadvantage – loan needs to pay if you sell your house and reduces equity for inheritors.

Buy down mortgage loan: there is two types of this loan, a temporary and permanent. They both work on points and lower interest rates. Advantage – lower repayments. Disadvantage – need to pay higher down payment to lower interest rates.

3. The third option for loans is the special mortgage:

FHA mortgage: for first home buyers, people with little down payment and credit problems. Advantage – low down payment and repayments. Disadvantage – cap on loan and limited mortgage options.

Veteran Affairs Loan: only for people and widowers of the armed forces. Advantage – no down payment necessary. Disadvantage – not available for everyone and usually takes longer.

As you can see there are many loans you can get when you want to purchase a home. The best way to find out which one will work best for you is to talk to a financial professional and they will go through them with you.

What is PMI? PMI, or private mortgage insurance, is an insurance that home buyers are required to purchase if their down payment is low. Private mortgage insurance is usually required of home buyers whose down payment is 20 percent or less of the property’s sale price or appraised value. This insurance was created by private mortgage insurers, and was created to provide protection for the lender in the case that the home buyer should default on the loan.

Private mortgage insurance has helped create millions of new homeowners by allowing people to buy homes with much smaller down payments than had previously been accepted. As home prices continue to soar, the ability to purchase a home with a small down payment has become even more important. Private mortgage insurance allows potential homeowners to buy a home sooner, with even just a 5 percent down payment. Also, private mortgage insurance can help you qualify for a greater number of home loans.

The cost of private mortgage insurance varies according to the down payment and mortgage loan, but it typically equals approximately one half of one percent of the total amount of the loan. But how exactly is private mortgage insurance calculated? Let’s assume you bought a house for $100,000, for which you put set down a 10 percent down payment. Your lender will multiply the remaining 90 percent by .005 percent. The result, $450, is your annual private mortgage insurance, which is divided into monthly payments.

After a few years of paying down your mortgage loan, you should be able to stop paying private mortgage insurance. You should keep track of your payments and contact your lender when you reach 80 percent equity so that your private mortgage insurance can be cancelled. In 1999, a new law, the Homeowner’s Protection Act, was passed that requires lenders to notify you, the buyer, how many months and years it will take for you to pay the 20 percent of your principal. However, it is still a good idea to keep track of it on your own.

This same law also allows lenders to make certain buyers continue their private mortgage insurance, all the way to 50 percent equity. This requirement applies to buyers classified as high risk borrowers. Some Federal Housing Administration loans may even require that home buyers acquire Private mortgage insurance through the lifetime of the loan.

If the idea of paying private mortgage insurance for years sounds unappealing, you’re not alone. Over the years, new ways of avoiding payment of the private mortgage insurance—even when you don’t have the 20 percent down payment available—have emerged. One strategy commonly employed to avoid paying private mortgage insurance is to pay more interest on your mortgage loan. Some lenders will waive the private mortgage insurance requirement if the home buyer agrees to pay a higher interest rate on their mortgage loan. One advantage to this strategy is that mortgage interest becomes tax deductible.

Another way to avoid paying private mortgage insurance is by using the ’80-10-10’ loan strategy. This strategy involves taking on two loans and putting down a 10 percent down payment to purchase a home. One loan finances 80 percent of the mortgage, while the second loan finances the remaining 10 percent of the sales price. The second mortgage—the one that covers the 10 percent—has a higher interest rate. But since the amount of the loan is low, the interest charges are relatively easy to pay off. Under this plan, the mortgage interest is also tax deductible.

You may also be able to cancel your private mortgage insurance if you can prove that your home has increased significantly in value. If the value of your home has gone up, you may already have 20 percent (or more) of the equity you need to cancel your private mortgage insurance. You can submit evidence of this to your lender, but the process is slow. Expect to wait up to two years for the lender to make a decision.

You may be required to continue paying private mortgage insurance, however, if you have a poor payment history, or if your credit record reflects any liens placed against your property. You should speak to your lender to see how any changes in your credit record may affect your use of private mortgage insurance.

5 Facts about Credit Scoring

Are you thinking of buying a house or a new car? If you’re like most people, you’ll probably have to secure a bank loan. When it comes to money lending, most financial institutions strive to live by maxim of ‘only good credit need apply.’ Yes, there are lending institutions that will lend to individuals or businesses with very low credit scores (known as ‘bad credit loans’), but these loans often come at a high price. These types of loans frequently come with very high interest rates and exorbitant fees that can end up costing consumers much more than the original purchase. Even if your credit score is not necessarily bad, but just ‘so-so’, chances are you’ll end up paying a lot more than a person with very good credit.

So what exactly do lending institutions consider good credit? Good credit is based on your credit report and the accompanying three-digit FICO credit score.

Your FICO credit score is based on a number of factors, including:

1) Your payment history. This includes whether you have missed any payments, or paid late. Payment history also involves the different types of payments (car, house, different credit cards, etc…) you make each month. Roughly 35% of your credit score is determined by your payment history. A person with good credit probably has a consistent record of paying on time each month over a long period of time, with little or no missed payments.

2) The amount you owe on all your different accounts. Do you have dozens of accounts carrying high balances? Are most of your credit card accounts maxed out? Or can most of your debt be traced to one or two accounts, such as your mortgage and car payments? Good credit is hard to attain if you carry balances on many different accounts. A person with good credit probably only carries balances on one or two accounts.

3) The length of your credit history. This refers to whether you have established sufficient history to provide an accurate portrait of how you manage your finances. Lending institutions want to know whether you have a history of paying on time. Keep in mind that even if you have managed your credit perfectly, if your account is only a year old, it probably won’t raise your credit score immediately. Keep it up for a few years, however, and watch your credit score soar.

4) Types of credit. Another factor used in calculating your credit score involves the types of credit you use. Different kinds of credit include credit cards, mortgages, and installment loans such as car and student loan payments. If the type of credit you most commonly use weighs heavily on credit cards and other high-interest credit sources, your credit score will probably suffer.

5) New or recent credit history. The last factor used to calculate your credit score has to do with your recent credit history. This includes any new credit accounts you may have opened, whether you’ve made requests for new credit, and how you’ve recently managed all of your credit. If you decide to open several new accounts at once, be warned that this may hurt your credit score. A person with good credit most likely does not open new accounts frequently, but rather has a long history with a few accounts that are in good standing.

Now that you have an idea of what good credit looks like, how can you improve your chances of getting a loan if your credit is less than stellar? First, obtain a copy of your credit report. Your report is available from any of the three major credit reporting bureaus—Experian, Equifax, and TransUnion. By law, you can obtain a free copy of your credit report once a year, but additional copies will cost you approximately $13. Review your credit report carefully and contact the credit bureau if you spot any errors or omissions (be prepared to provide documentation).

Remember that so much of your credit score depends on your payment history. The importance of paying your bills on time, every month, cannot be stressed enough. Many banks offer you the option of scheduling automatic payments each month. Make use of these, if your financial situation allows. Also, don’t open new credit accounts if you don’t intend to use them, and don’t open and close accounts frequently. Instead, focus on using responsibly the accounts you already have. This alone will raise your credit score, and make you much more likely to get best loans from lending institutions.