The road to financial freedom can be a long one. Purchasing a home early in your life is one surefire way to get there just a bit faster. In this post, we’ll explore a necessary concept in mortgage finance: amortization.
Although the word “amortization” may be a little intimidating, it is a straightforward concept.
Amortization is the process of paying down a loan over a set period of time, usually with an interest payment included.
Once you close on your home and move in, you’ll enjoy one month of your home without paying the mortgage. This is because mortgages are paid in arrears, which means you pay for it after the fact.
When you get your first mortgage bill (or it’s deducted from your banking account), the total sum will be comprised of two parts:
- Principal, which is money that directly pays down your loan balance.
- Interest, which directly pays down the interest you owe on the loan.
If you look at the mortgage amortization chart below, you’ll see how these two components work together over time. For the majority of doctor loan—and conventional mortgages—you’ll start out paying more interest. The amount you pay for interest will gradually decrease over time. The amortization schedule determines the percentage of funds that pay down interest versus principal.
Sample Amortization Schedule
Let’s say you borrowed $325,000 through a doctor loan lender at 4.30% over 30 years. Take a look at the first row above, highlighted in yellow. Your first payment would be $1,608.33. Of that amount, a whopping $1,164.58 would go towards paying down the interest portion of the loan. The principal would be paid down by a mere $443.75.
Will I always pay more interest?
As the loan matures, you’ll start paying more towards your principal than interest. In this example, things don’t tip over until payment 168, when you’ll pay $801.91 towards interest and $806.42 towards the principal.
What can I do about this?
For this reason, we recommend paying one extra (one month) payment per year. This can save you a significant amount of money over the life of the loan and help you navigate a more comfortable ride down the road to financial freedom.
Read more about how to get a physician loan here.