Mortgage amortization schedule
In the good old days, people set aside some amounts on a regular basis, to buy an object they desired. Borrowing was looked down upon, and therefore, people resorted to simple and frugal living. There were, of course, those who borrowed even in those days. These people lived well too, inciting jealousies and contempt for their method of earning wealth.
A decade long financial recession, which spared nobody financially, taught the importance of deficit financing to the Americans. Suddenly, borrowing ceased to be a dirty word. People started grasping the importance financial gearing and the word borrowing got its respect. This was followed by industrial revolution, which brought prosperity, leaving surplus in the hands of bankers, who encouraged borrowing, to show some profits on funds lodged with them. Many innovative schemes of finance came up over the years.
One of such methods is mortgage finance. Under this type of borrowing, the borrower executes a mortgage deed on one of his or her assets (generally real estate), and borrows a sum, which is repayable over a predetermined period. Failure to repay the amount in the specified period puts the lender in a position to sell the mortgaged property for recovering the dues as well as outstanding amounts.
Shorter-term mortgage loans may have a repayment schedule wherein the borrower pays the interest every month or quarter, and finally the borrowed principal at the end of the term. Terms of longer-term mortgage loans may show many variations. There are mortgage loans offered by lenders in which the borrower pays only interest in the initial few years. After a few years, the loan is amortized along with interest, i.e., the loan is repaid over the balance period along with interest. This repayment is done in equated installments, generally on monthly basis. The equated monthly installment therefore has an interest component, and a principal component. Such loans are designed based on borrower's earning and repayment capacity. Generally, however, the installments are paid over the entire period of the loan.
Lenders prefer to provide mortgage loans on assets, which have values that show some steadiness or appreciation in values. Therefore, real estate properties are ideal for creating such mortgages.
Apart from the underlying asset, on which the borrower must have clear rights and titles, there are other factors that are important in mortgage loan schedules. These factors are age of the borrower, monthly earnings of the borrower, quantum of borrowing, interest rates and term of the loan.
Age factor is important for developing a mortgage amortization schedule because if the borrower intends to repay the loan over a period of 30 years, but is already 50 years old, it is obvious that repayment schedule will spill over on his retirement years. This means that the person will be repaying the loan right up to the age of 80 years. Apart from health and mortality factors, there is every possibility that the income he earns in later life is barely adequate to meet regular requirements. This is because as long as a person works, there is an annual increment, which compensates for inflation, and most of the time leaves a little surplus. However, once a person retires, there is no annual increment, i.e., the income stagnates. Over a period, inflation eats away into this stagnated income, making it insufficient for even regular expenses. Under such circumstances, it is more likely that the borrower will default on debt.
Monthly earnings of the borrower are also important for determining the quantum of mortgage loan, and loan tenure. If the borrower earns well, then he can repay the loan along with interest over a shorter term. However, if the borrower is not earning much, then the lenders consider longer term of loan repayment. If the borrower's earnings are inadequate to cover the loan and interest for this longer term, then the quantum of loan is brought down. Some lenders do offer more loan than what is the borrower's earning. This quantum is determined based on some intermittent anticipated receipts. If the borrower is likely to receive some amounts within loan tenure, then the loan is duly increased by the lender with a view of recovering it from such receipts.
If interest rates are high, then mortgage installments also become high. This may result in loan becoming out of reach of the borrower. The lenders then consider whether it is possible to extend the term. By doing so, installment comes down, and the borrower may be able to afford it.
Interest rates may be calculated on fixed rates or flexible rates. If the interest rates are fixed, then the borrower has no hope of saving anything from what he has already contracted for on the mortgage. Adjustable interest rates give the borrower this benefit, especially when the interest rates are dipping. In such cases, the quantum of installment is left untouched. Instead the number of installments is brought down. Therefore, if the borrower had borrowed for 10 years, he would be paying 120 installments. If the interest rates drop, he would pay 115 installments. If interest rates increase, he could end up paying 125 installments. This is not the case with fixed interest rates.
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