How do home mortgages work?
I’m a renter just out of college, and looking for the first time into what it would take to buy a house. What is amortization? Is there an equation to determine how much of your monthly payment goes toward interest and how much toward principle? What is an interest-only loan and why would someone want to get it? Why does the homebuyer have to insure 20% of the mortgage privately?
Tags: home, Mortgages, Work
Amortization is a method of spreading the cost of purchasing an asset over time. You can easily calculate this online at http://www.mortgage-calc.com. You can display/print an amortization schedule which will show you exactly how much goes to what.
The majority of the monthly mortgage payment goes to interest at the start of a mortgage and this amount decreases during the term of the mortgage until it’s paid off.
You should not do an interest only loan (period end of story). This is my opinion, but in today’s market, this would be idiotic, and was even idiotic a few years ago.
Most lenders will lend 80% of the value of a property. But if you only have 5% down, the lender requires a mortgage insurance policy which will cover them in case you default later.
After all, with just 5% down (or even less in some cases), they are taking all the risk. Yes, a mortgage is backed up by an asset like a home, but banks are not in the business to own homes, they are in the business to give loans. So if you default, they do not want to deal with the property. Especially now since there are so many loans in default.