Understand the Home Loan Amortization – A Complete Guide

Home loan Amortization is a process by which a loan is spread out over a period of time to ascertain the number and amount of EMIs one would end up paying in all. One would be paying the loan’s interests and principal in different amounts each month, although the total payments does remain equal for each period. For better understanding of the monthly loan payments, the term Amortization is used- which basically helps with the accounting process.

The reason why Amortization is important is because in case of home and auto loans, although it might seem to the applicants that each monthly payment is the same, the parts comprising that payment undergo a change with every subsequent payment. The parts in question include-

● the interest cost and,

● the reduction of the principal, or the actual loan balance

Those who have been paying off their home loans for a long time are aware of the fact that the interest costs are always the highest during the beginning of the loan tenure. With long term loan especially, the majority of each periodic payment is mostly towards the payment of interest and only a small balance of the loan is paid off. So initially, not much goes towards the repayment of the debt’s principal in the early years and this is something that most first time home loan borrowers find it difficult to understand. It might seem that they have paid quite a few lakhs in the first three or five years of the loan tenure, but still feel that actually only a few thousand has been paid off. Home Loan Amortization Schedule is needed to help explain this process and you can look into this after one has established that they are eligible for a loan with the use of housing loan eligibility calculator. One should also submit some documents required for home loan to avail the loan.

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As time goes on, gradually the principal repayment increases and the proportion of interest from the EMI payment decreases. With Amortization, the loans are designed to completely pay off the loan balance over a period of time and the last loan payment will be to pay off the final outstanding principal amount. It all depends on the math that works out the ratios of debts, home loan rates and principal payments each month. With the Amortization table, it is possible to see how much loan is paid off and what is the outstanding amount at any given point of time.

In contrast, there is the unamortized loan where the payments made are only interest only payments predominantly during the beginning of the loan tenure and principal is paid off in a bulk towards the end of it. With amortized loans, since the principal and interests are paid off together, one can get equity in the asset with each payment. However, with both interest and principal paid off together, the monthly payments might also be a bit high. Also, the longer the tenure, the more expensive the loan tends to become since the true cost of the loan increases with all the added interests. Hence, although it might seem that the EMIs are fitting into the monthly budget, a loan borrower must find out exactly how much extra he ends up paying by the end of the tenure.

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So for some, unamortized loans have a greater appeal because of the interest only payments and although no principal is being paid off at the very beginning, one can keep on making low payments till one gets hold of a large sum of money and pay off the loan all at once entirely. So those who are self employed or work on bonuses and commissions and come into possession of a lump sum of money, find unamortized loans to be more attractive.

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