repay a loan
An optimal mortgage strategy also includes adequate repayment plans, that is, the return of the mortgage loan. It can be repaid in one go or in equivalent installments over a longer period. Therefore, it is important to address the questions: How much is to be written off? How am I going to repay the mortgage? What type of amortization suits me best?
Amortization is, in principle, the repayment of a mortgage. Mortgage lenders typically require mortgage amortization in excess of 65% of the property value, while additional amortization is voluntary. If a property is purchased or a house is built, 80 percent of the value of the property can be taken as a mortgage, while 20 percent must come from the borrower's own funds. Mortgage amounts in excess of two-thirds of the property's value are designated as second mortgages and must be repaid within 15 (previously 20) years or at the latest at retirement age.
No Second Mortgage Option: Anything over 65% loan-to-value must be repaid within the agreed time (by retirement age at the latest). Whether or not the mortgage is worth paying off ultimately depends on two crucial questions:
How is mortgage amortization determined?
The basic concept of mortgage amortization is simple: You start with a loan balance and pay it back in equal installments over time. But if you look closely at each payment, you'll see that the principal and interest on the loan are paid at a different rate.
"Loan amortization is the process of calculating loan payments that amortize—that is, pay off—the amount of the loan," explains Robert Johnson, professor of finance at Creighton University's Heider School of Business.
If you have a fixed-rate mortgage, like most homeowners, your monthly mortgage payments are always the same. But the breakdown of each payment — how much goes toward the loan's principal versus interest — changes over time.
This transition (from mostly interest to mostly principal) only affects the breakdown of your monthly payments. If you have a fixed-rate mortgage, the amount you pay each month for principal and interest will stay the same.
The breakdown of payments is very important because it determines how quickly home equity builds up. In turn, net worth affects your ability to refinance, pay off your home early, or borrow with a second mortgage.
Calculation of amortization
For many people, buying a home is the largest financial investment they will ever make. Due to its high price, most people usually need a mortgage. A mortgage is a type of amortized loan for which the debt is repaid in periodic installments over a certain period of time. The amortization period refers to the time, in years, that a borrower decides to dedicate to paying off a mortgage.
Although the most popular type is the 30-year fixed-rate mortgage, buyers have other options, including 15-year mortgages. The amortization period affects not only the time it will take to repay the loan, but also the amount of interest that will be paid throughout the life of the mortgage. Longer repayment periods typically mean smaller monthly payments and higher total interest costs over the life of the loan.
In contrast, shorter repayment periods usually mean higher monthly payments and a lower total cost of interest. It's a good idea for anyone looking for a mortgage to consider the various repayment options to find the one that best suits management and potential savings. Below, we look at the different mortgage amortization strategies for today's homebuyers.
Reamortize the personal loan
A shorter amortization can save you money because you pay less in interest over the life of your mortgage. Your regular mortgage payment amount would be higher, since you're paying off your balance in less time. However, you can build equity in your home faster and become mortgage free sooner.
See the chart below. Shows the impact of two different amortization periods on a mortgage payment and total interest costs. The total interest costs increase considerably if the amortization period exceeds 25 years.
You don't have to stick with the amortization period you selected when you applied for your mortgage. It makes financial sense to reevaluate your amortization each time you renew your mortgage.
