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Amortization is a term you might hear when you are looking for a home loan, but you might not know what it means. Someone might tell you that your loan will get fully amortized over the period of time you have your loan and you might wonder what in the world they are talking about. Understanding what amortization is will help you understand what a loan officer is trying to say to you. 


Calculating the total amount of principal and interest that will be paid over the duration of the loan, and figuring out how much will be interest and how much will be principal is called amortization. Every month when you make your mortgage payment, you are paying a portion that is directly principal and a portion that is directly interest. Until the loan is all paid off, the total amount will continue to go down every time you make a payment.  


When your loan officer figures out the amortization schedule, he will give it to you so that you can see how much your monthly payment will be and how it will be divided over the period of your loan. The totals will be on there, including the initial loan amount plus the principal and the interest that you will end up paying in the end of your loan term. The interest will actually end up being about three times the principal, which might surprise you. You might want to get different amortization schedules from different lenders so that you can compare them and decide what will be best for you. 


Whether you are doing a mortgage refinance or getting a new home loan, you should look at the interest rate because this will directly affect the amortization amount. In today’s economy, the interest rates and pretty low, so mortgage refinancing or getting a bad credit mortgage could both even get you a fairly low rate. With a fixed rate loan amortization schedule, you will notice that the total amount of interest paid for the duration of the loan will be lower. 


When you get a Good Faith Estimate from a loan officer, it will typically have the amortization schedule so that you can look it over and see what your actually payment will be each month and how it will all add up for the period of your loan. Knowing what amortization is will help you to make a better decision on what mortgage company to get when you are buying or refinancing a home.