Are You Paying Too much For Your Mortgage?

An amortization schedule, though one of the most important documents in a mortgage process, is still the most overlooked. Rarely do home loan or mortgage applicants take the time to speak with their bankers or their loan advisors to understand what an amortization schedule is and how it helps.

The word ‘Amortization’ is an accounting term that refers to the amount of principal and interest paid during the loan term.  The amortization schedule gives information about the number of installments paid, the breakup of the principal and interest paid, the principal paid and the balance outstanding. 

The Example

In order to understand this better let us take up an example.

Suppose you took a home where

Loan Amount - $10,00,000

Interest Rate – 12%

Term Period – 1 Year

And let’s say the banker tells you that this is how you are supposed to repay your loan

Number of Installments – 12

Monthly Installment - $88,849

The banker also gives you an amortization schedule that would look like this. 

The Amortization Schedule

No of Installments Paid	Installment Paid (A+B)	Principal Paid (A)	Interest Paid (B)	Principal Outstanding	% Principal Outstanding
1	$88,849	$78,849	$10,000	$9,21,151	7.88%
2	$88,849	$79,637	$9,212	$8,41,514	15.85%
3	$88,849	$80,434	$8,415	$7,61,080	23.89%
4	$88,849	$81,238	$7,611	$6,79,842	32.02%
5	$88,849	$82,050	$6,798	$5,97,792	40.22%
6	$88,849	$82,871	$5,978	$5,14,921	48.51%
7	$88,849	$83,700	$5,149	$4,31,221	56.88%
8	$88,849	$84,537	$4,312	$3,46,685	65.33%
9	$88,849	$85,382	$3,467	$2,61,303	73.87%
10	$88,849	$86,236	$2,613	$1,75,067	82.49%
11	$88,849	$87,098	$1,751	$87,969	91.20%
12	$88,849	$87,969	$880	$0	100

Understanding the Amortization Schedule 

After looking at this self-explanatory amortization schedule a question that might come up in your mind is that how is the Principal Paid(A) and the Interest(B) calculated.

To calculate the Interest we need to apply the following formula

Interest = (Principal*Rate*Time)/100

Principal = Principal Outstanding after paying last one’s installment

Rate = 12% (on an yearly basis)

Time = 1 month = 1/12 year

You will see that the rate and time will remain the same whereas the principal will change month on month 

1^st Installment

Interest = 10,00,000*12*(1/12)/100 = 10,000

Principal Paid = = $88,849 - $10,000 = $78,849

Principal Outstanding = $10,00,000 - $78,849 = $9,21,151

*Remember: This month’s outstanding principal will be next month’s principal

2^nd Installment

Interest = $9,21,151*12*(1/12)/100 = $9211.51

**For the sake of simplicity let us round it off and now the Interest is $9212

Principal Paid = Installment Paid – Interest Paid = $88,849 - $9212 = $79637

Principal Outstanding = $9,21,151 - $79637 = $841514

This is how you would go on calculating the interest paid for each month and also the principal outstanding.

At the end of 12 months you would see that Principal outstanding becomes 0 and you may then add up all the interest amounts paid to get the exact value of the total interest paid.

In this case the total interest paid comes out to $66,186

Word of advice

Whenever you take a mortgage loan do ask the lender to provide you the amortization schedule. This will not only tell you the exact interest amount you are paying on your loan but it would also help you to know the exact principal outstanding at any point in time during the loan period, in case you are planning to pre-close your loan.

A Bank Home Loan is Not Your Only Option

Most people, who want to buy a new home in a state like Texas usually consult a mortgage company that can help them find the most suitable property in the competitive housing market. If you too are looking to buy a home in this state, a bank loan is likely to be the first place you think of going. However, it is not your only option. Depending on your financial situation and preferences, you can also consider one of the following options for securing home loans in Texas.

Conventional Loan
These mortgages are offered by private lenders unlike others that are offered by government-sponsored ones. The two major types are –

Fixed rate mortgages -  Interest rates remain non-fluctuating for a determined time
Jumbo mortgages - even for borrowers with low credit scores; however, the down payment for Jumbo mortgages is larger than other mortgages.

Due to stringent lending regulations in the U.S, getting conventional mortgages has become increasingly difficult. Lending institutes are likely to reject loan applications if the borrower's’ monthly income and credit score are low.

FHA Home Mortgage Loan
The United States Federal Housing Administration (FHA) makes provisions for people who have less household income to be able to secure a home loan easily. Only approved mortgage companies can provide such loans. While the interest rate and other terms are favorable for people with lower cash reserves, they need to pay a minimum down payment of 3.5%. However, there is a 1.75% percent premium that is to be paid to the FHA upfront. This amount is usually adjusted in the loan. It means the burden falls on the shoulders of the lender. The overall amount paid by the borrower for an FHA loan is higher than other types of loans.

VA Mortgage Loan
This mortgage is for veterans, which can be sanctioned by approved lenders only. Veterans and their spouses (in the event of their death) can buy homes without a down payment if they can’t secure a private loan. There may be funding fees from zero (0) to 3.15%. The limit for this loan without a down payment can’t go beyond $625,500.

Loan for the First Time Homebuyers
In Texas, there’s the My First Texas Home Loan Program or TMP 79. Another program is known as the Texas Department of Housing & Community Affairs or TMP 77. These programs help people who have low to moderate incomes who have never owned a home (or at least not in the past three years). It helps borrowers get a competitive interest rate with a 30 year repayable mortgage. The amount may cover the down payment and the closing costs as well.

You may not be able to decide which program suits you the best. Keep in mind that the above-mentioned programs are not the only ones that exists. In order to make a smart and informed decision, contact an expert mortgage consultancy firm and learn about your options.