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Finance: What is a mortgage's amortization schedule, and how does it work? 3 Views
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What is a mortgage's amortization schedule, and how does it work? The mortgage amortization schedule is predicated on the amount and the duration. Payments are made monthly and the duration can be any length of time in general from 5 to 30 years. The schedule requires less monthly payment the longer its duration, but winds up costing more due to the added time period of charged interest.
Transcript
- 00:00
Finance allah shmoop what is a mortgage amortization schedule and
- 00:07
how does it work All right we'll think of mortgages
- 00:10
Is the jet i warrior of bonds Their special government
- 00:15
kissed even there not just a typical bond like a
- 00:17
car loan or alone for that new turbocharged skateboard you
Full Transcript
- 00:21
had your eye on Mortgages carry one key special feature
- 00:25
that's an integral part of what has made america great
- 00:28
The interest payments on bonds for mortgages are tax deductible
- 00:33
So if you're paying fifteen hundred bucks a month and
- 00:35
mortgage payments and the highest or a marginal tax rate
- 00:38
that you pays forty percent with federal and state taxes
- 00:41
combined and most of that fifteen hundred boxes interest which
- 00:44
is the case in the early years of pain off
- 00:46
these things than the fifteen hundred dollars payment feels like
- 00:49
only about nine hundred bucks on an after tax basis
- 00:52
like forty percent of fifteen hundred and six hundred dollars
- 00:55
You subtracted from the fifteen hundred there And you get
- 00:58
sweet luscious deduction meaning that it's say well ninety five
- 01:01
percent plus of that fifteen hundred dollars for interest than
- 01:04
in that year You'd have twelve payments of fifteen hundred
- 01:06
dollars or total payments made to the bank of eighteen
- 01:09
grand That's round a bit here and say that seventeen
- 01:12
grand of it was interest i you paid down a
- 01:14
thousand bucks of principle And if you earned ninety thousand
- 01:17
bucks that year with the tax rate of say thirty
- 01:19
percent federal in ten percent state on earnings from seventy
- 01:23
thousand to one hundred grand well then on the amount
- 01:25
over seventy grand iaea get to that ninety grand of
- 01:29
your full year earnings Well you would take off or
- 01:32
deduct seventeen thousand dollars from the ninety and pay taxes
- 01:36
on earnings of just seventy three thousand box The government
- 01:39
lets you deduct the interest payments against your taxable earnings
- 01:42
as if in fact you had never had those taxable
- 01:45
earnings in the first place They essentially give you a
- 01:48
discount on the net after taxes interest rate your paying
- 01:51
in the form of a give back on your taxes
- 01:53
So let's dive into a mortgage amortization schedule and amortization
- 01:57
here just refers to the pace at which you reduce
- 02:00
the principle you owe over time and we have this
- 02:04
pretty chart to help illustrate that So you finally bought
- 02:07
that four hundred fifty thousand dollar home It's an almost
- 02:11
literal shoebox in palo alto but well its home or
- 02:14
it will be You went to the bank and got
- 02:16
alone for three hundred fifty thousand dollars After putting one
- 02:18
hundred grand down your loan is a thirty year loan
- 02:21
They offer them and all kinds of flavors like fifteen
- 02:23
year loans interest only loans or reverse mortgages A whole
- 02:27
different kettle of fish there Well in this case note
- 02:29
the monthly payments Each payment is the same two thousand
- 02:32
forty two dollars fifty cents a month and note that
- 02:36
the first payment is three hundred sixty five bucks in
- 02:38
change in principle paydown See right there and sixteen seventy
- 02:42
seven and change in interest So after that first month
- 02:45
the principal owed is three hundred fifty thousand minus the
- 02:47
three hundred sixty five dollars in principle you paid down
- 02:50
or three hundred forty nine thousand six hundred thirty five
- 02:53
dollars ish So if you go on about your business
- 02:55
for fifteen years well the ratio of principle to interest
- 02:58
looks dramatically different at this point Well again on the
- 03:02
same payment of two Oh for two point five o
- 03:05
the principal covered by that payment is eight hundred sixty
- 03:08
box and the interest on the loan is now down
- 03:10
to about eleven eighty three And note that after fifteen
- 03:13
years thie amount owed on the home is down from
- 03:16
three hundred fifty thousand Right That's the loan you originally
- 03:19
took out Two Now a principal set of about two
- 03:22
hundred forty six thousand like you've paid down over one
- 03:24
hundred grand So you're still making the same monthly payment
- 03:27
of two oh four to fifty But on lee eleven
- 03:30
eighty three of it the interest portion is deductible So
- 03:33
from an after tax perspective that mortgage gets a bit
- 03:36
more expensive each year as the principal has paid down
- 03:39
in a higher portion of the mortgage payment then comprises
- 03:41
principal pay down which is not deductible versus interest payments
- 03:45
Which are so then what do things look like near
- 03:48
the end Different We're talking about the end of the
- 03:51
mortgage period Yeah well that last payment is again in
- 03:53
two o four to fifty but it comprises two o
- 03:56
three Two of principle pay down and yes about in
- 04:00
box of interest That's it So then after thirty years
- 04:03
you'll have paid a total interest amount of over three
- 04:05
hundred eighty five grand That's just an interest So think
- 04:08
about that number It's more than the entire amount of
- 04:10
the loan you originally took out So you have wow
- 04:13
two oh four to fifty a month Tone your dream
- 04:16
home That's it right No not at all Remember you
- 04:19
have insurance and depending on what kind you get and
- 04:22
i'll figure around three hundred bucks a month toe over
- 04:24
a grand And then you have real estate taxes and
- 04:27
figure about one and a half percent of the purchase
- 04:29
price which then goes up about the rate of inflation
- 04:31
overtime So on this four hundred fifty thousand dollar home
- 04:34
that's real estate taxes of about sixty sir seven fifty
- 04:37
ish year about five fifty a month And for many
- 04:39
first time home buyers you have to get pm i
- 04:42
or private mortgage insurance That's kind of safety cushion for
- 04:45
the bank not for you and is laid on is
- 04:48
an additional expense When the homeowner has put on ly
- 04:51
a small amount down as a down payment that is
- 04:54
the homeowner has to pay some percentage of alone They've
- 04:57
taken out In addition to that base interest of say
- 05:00
six deductible percent like you have to pay an extra
- 05:02
one non deductible percent in pm i until they can
- 05:06
get the bank to agree that their loan to value
- 05:09
ratio is less than eighty percent That's kind of like
- 05:12
the bank's magic number or set another way that the
- 05:14
equity they have in the home is mohr than twenty
- 05:17
percent of its value Or so why like why would
- 05:20
the bank do this other than to make it yet
- 05:22
more profit from you mr or mrs vulnerable mortgage taker
- 05:26
But the reality is that if the bank ever does
- 05:28
have to foreclose on the house and then sell it
- 05:30
and spend a fortune on legal bills evicting you let
- 05:33
alone dealing with all the bad press it gets extremists
- 05:36
all excited about regulating the bank's further you know because
- 05:40
of course it was the bank's fault that you were
- 05:42
drunk and got fired from your job and spent your
- 05:45
dough on fast cars and even faster robots So banks
- 05:49
make risky small down payment makers take out cushion insurance
- 05:53
in case well this ever happened so that they aren't
- 05:55
the ones left owning a house they never signed up
- 05:58
to buy Yeah Hey at least there's a white picket 00:06:00.835 --> [endTime] fence Go for it No
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