Vital Signs and Amortization
The concept of amortization is very comprehensive in nature. A common man needs to understand the details of the concept in order to grasp the entire process of amortization. The arena of mortgage financing is evolving day-by-day and is now offering multiple options and variables, which has made it difficult to keep them straight. Before taking the time to learn about amortization in depth, it will be better if we take a brief look at what exactly is the meaning of amortization.
What is the meaning of Amortization?
The paying off liability, such as the mortgage in regular installments over a specific period of time, is known as amortization. These payments can cover both the interest and principal amount. In other words, amortization is the process of eliminating a debt over time by making periodic payments. For instance, say that you are making mortgage payments every month. A part of that payment pays down your principal and some of its portion also pays the interest you owe.
The major part of each payment at the initial stages of an amortization covers the interest. As time passes, each payment pays more of the principal amount, and thus you carry out the process of ‘amortizing’ of the loan.
In the last two years, the instances of extended amortization being added and then taken away in the option of 40 years for high-ratio mortgages has been quite prominent.
A longer amortization period is still questionable. This is because, overtime, a longer amortization adds to the interest expense. To reduce the effective amortization to 25 years or below, borrowers can use any one of the several extra payment privileges, or several generous bonuses that are available in all the mortgages to expedite the intensity of their payments in the future years. This feature can prove helpful in times of high prices where there is a huge disparity between the rising prices and income.
Borrowers can also opt for lower payment and can make use of funds to meet their other priorities such as insurance programs or any other investments.
How does Amortization Works?
If you are eager to learn about how amortization works, then it will better if you understand the amortization schedule. The amortization schedule will show you each payment you make on one line and how it is applied to the loan. Furthermore, you can also calculate your total remaining balance and the total amount of interest you have paid over the entire life of the loan.
The Five Vital Signs of Amortization
Mortgage lenders analyze the file based on the following five basic levels:
Credit History: It is the record of a company’s or individual’s repayment or past borrowing. It also includes information about bankruptcy (if any) and late payments. It is also known as ‘credit reputation’ or ‘credit score’.
Income stability from employment or self-employment.
The percentage of the total family income as compared to debt: Any required payments on leases, loans, credit cards, lines of credit alimony, or support are considered.
The percentage of the total income of the family for housing costs including interest, property taxes, principal, utilities, and percentage of dwelling units if they are applicable.
There are an abundance of lenders available in the market. These different lenders give special importance or weight to any of the factors mentioned above. This in fact depends on what kind of market segment the lender wishes to appeal.
In order to get favorable terms, conditions, and exclusive rates from some of the primary lenders who fall in the Tier one Category, you will have to present a file which will include:
A good credit history
- Housing costs not in surplus of 34% of your gross income
- A total debt service not in surplus of 42% of your gross income
- A down payment of minimum of 5% from non-borrowed sources.
However, there are some exceptions to the above mentioned guidelines such as possessing a strong credit history which is represented by a Beacon Score (the number which ranks the credit-worthiness of individuals) of 680 or higher. The criterion of underwriting largely varies from lender to lender.
When handling any kind of financial matters regarding the purchase of a property, it is always advisable to seek the help of a mortgage professional in order to get the best deal prevailing in the market.