If you are like the millions of Canadians out there who are paying into a mortgage than there is a good chance at some point you have been exposed to the term Mortgage Amortization. There is also a large chance that the first time you saw or heard the term amortization you had no clue what it was talking about.
I mean…“Amortization”, what a strange looking and odd sounding word; if you had never seen it before you probably would have no idea what it means.
The first time I saw this word I thought it had to have something to do with the funeral business or that it was a French sounding word, but once I recognized other terms it was associated with I quickly realized that it had nothing to do with death and learned quickly that rather it had to do with another thing that sometimes brings people pain and misery…money.
In a general sense the term “Amortization” or amortization, as it is sometimes referred to, is the process of accounting for or increasing for an amount over a period of time.
Ironically, as I guessed that the term had something to do with death; the word is derived from an older English word amortisen, which meant to kill.
Dictionary.com actually defines amortization as:
1. an act or instance of amortizing a debt or other obligation.
2. the sums devoted to this purpose.
To get right down to what is important; “mortgage amortization” is the occurrence in which the principal balance on one’s mortgage declines over time as that borrower makes payments on a periodic schedule. So in other words it is the situation where your mortgage’s principal balance keeps on getting smaller as you make your monthly or bi weekly mortgage payments that are large enough (greater than just the interest) so that you are truly paying things off (aka the original borrowing amount known as the principal); an eating into the deficit so to speak.
For homeowners amortization is the pathway you want to be on when it comes to your mortgage. Because if your mortgage is not amortizing this means that you are not making any advancement in regards to paying off your loan.
A majority of the time, and so has been the case historically, mortgages are set up to automatically amortize as long as a homeowner making the payments pays off at least the minimum payment at each scheduled payment block. However, there have been cases where some different situations exist such as mortgages with adjustable rates or interest and the minimum payments are fixed so that they might not adjust to copy the interest rates so sometimes the amortization process does not occur. And also there are some negative amortization mortgages; which is the case when mortgage payments do not end up eating away at the principal amount but rather which simply pay off a portion of the interest and therefore the original principal amount keeps on increasing although payments are made because the payments are not large enough. This is not the type of situation a homeowner or anyone taking out a mortgage would want to find themselves.
When someone takes out a mortgage from a bank or another lending institution the lender will sit down with the borrower and they will layout for them the amount of periodic payments they feel is correct for the life of the loan. So for example, with a 5 year fixed rate mortgage the minimum payment might be bi weekly and a little larger than what one might find with a 10 year mortgage. Each of these periodic payments (bi weekly, monthly, etc.) must fully cover the interest and also partly pay off a proportion of the principal for the mortgage in order for that mortgage to be in the amortization process and to eventually amortize completely. This is your ultimate goal as a mortgage borrower to eventually pay off this loan, or for the sake of this article, amortize your mortgage and end the term of the loan; making you a much happier and much less in debt person.
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