Finance: What is a mortgage's amortization schedule, and how does it work?

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.

CoursesFinance Concepts
FinanceFinance Definitions
Financial Responsibility
Personal Finance
Finance and EconomicsTerms and Concepts
LanguageEnglish Language
Life SkillsFinance Definitions
Personal Finance
SubjectsFinance and Economics

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