Does Amortization Have Anything to Do With Financial Death?
The word Amortization is a financial term relating to loan payments, but to be sure we have an accurate definition let's check the source of all answers - Wikipedia.
"Amortization or amortization is the process of increasing, or accounting for, an amount over a period of time.
The word comes from Middle English amortisen; to kill, alienate in.
" So then I checked Amortization Schedule to give us further clarity.
"An amortization schedule is a table detailing each periodic payment on an amortizing loan.
" These phrases are most typically linked to a mortgage on a property, the most common of amortizing loans.
When I was a student of finance I learned that the word 'mortgage' comes from the Latin words "mort" meaning" death and "gage" meaning grip.
Have you ever viewed your mortgage as a "death-grip"? Does that make you feel great about the debt on your house? I should hope not! So it seems that we can draw a line to connect the phrase amortization to the mortgage on your house, and I'll explain that in more detail in later articles.
And we can most certainly continue the connection between the word mortgage and its meaning death-grip.
So, to me, there is definitely a link between the concept of amortization and death, but more specifically, financial death.
My intention in this article is not to be morbid or melodramatic, but it's my experience that almost all home owners with a mortgage fall into the trap of making their mortgage a permanent family member! How do they do this? They allow the Amortization Schedule to dictate the rate at which they pay off their mortgage - and this is the VERY SLOW way to be mortgage free.
How does Amortization lead to financial death? Let me explain a small portion of how the amortization of your loan is killing you financially.
Here's a further explanation from Wikipedia which I'll explain further in a minute.
While a portion of every payment is applied towards both the interest and the principal balance of the loan, the exact amount applied to principal each time varies (with the remainder going to interest).
An amortization schedule reveals the specific monetary amount put towards interest, as well as the specific put towards the Principal balance, with each payment.
Initially, a large portion of each payment is devoted to interest.
As the loan matures, larger portions go towards paying down the principal.
But what does this mean to you, specifically? When you take out a mortgage (loan) to purchase your property you agree to pay this loan back over a specific term, say 30 years, and this determines the level of regular payments you are required to make each month.
Out of each monthly payment, the lender deducts the interest payment due to them, and applies the remainder to the principal balance which reduces the amount you owe them.
At the beginning of your loan approximately 90% of your monthly payment goes to pay the interest on your mortgage and the remaining 10% of your payment is applied to the balance of the loan.
Did you read that? Ouch! 90% of your monthly payment gets swallowed up in interest, which is the cost of borrowing the money.
No wonder it costs you more than three times what you borrow to pay off your mortgage! (Check this out some time, count the number of payments and work out just how much you will pay over the term of your mortgage!) What compounds this is the fact that the loan balance reduces slowly over time, meaning you continue to pay a high proportion of your monthly payment in interest to the bank.
In fact, it takes you over 250 months to get to the stage where the portion of your payment reducing the principal is greater than the interest cost.
What that means is more than two thirds of your loan term is spent making significant contributions to the profits of the lender, while you struggle to make progress in becoming mortgage free.
And it is this that causes me to believe that Amortization leads to financial death.
There's a great tool I used to make these calculations which you can also use.
Check it out at www.
loanamortizationtable.
net and make your own assessments regarding your mortgage situation.
In all of this I implore you to take some time and understand how Amortization impacts your financial future, because if you do not, there is a very high chance that you will end up having a mortgage much, much longer than you anticipated.
Perhaps even long after you stop working.
The most important point I need to impress upon you is this; Your Mortgage Amortization Schedule is not your friend!
"Amortization or amortization is the process of increasing, or accounting for, an amount over a period of time.
The word comes from Middle English amortisen; to kill, alienate in.
" So then I checked Amortization Schedule to give us further clarity.
"An amortization schedule is a table detailing each periodic payment on an amortizing loan.
" These phrases are most typically linked to a mortgage on a property, the most common of amortizing loans.
When I was a student of finance I learned that the word 'mortgage' comes from the Latin words "mort" meaning" death and "gage" meaning grip.
Have you ever viewed your mortgage as a "death-grip"? Does that make you feel great about the debt on your house? I should hope not! So it seems that we can draw a line to connect the phrase amortization to the mortgage on your house, and I'll explain that in more detail in later articles.
And we can most certainly continue the connection between the word mortgage and its meaning death-grip.
So, to me, there is definitely a link between the concept of amortization and death, but more specifically, financial death.
My intention in this article is not to be morbid or melodramatic, but it's my experience that almost all home owners with a mortgage fall into the trap of making their mortgage a permanent family member! How do they do this? They allow the Amortization Schedule to dictate the rate at which they pay off their mortgage - and this is the VERY SLOW way to be mortgage free.
How does Amortization lead to financial death? Let me explain a small portion of how the amortization of your loan is killing you financially.
Here's a further explanation from Wikipedia which I'll explain further in a minute.
While a portion of every payment is applied towards both the interest and the principal balance of the loan, the exact amount applied to principal each time varies (with the remainder going to interest).
An amortization schedule reveals the specific monetary amount put towards interest, as well as the specific put towards the Principal balance, with each payment.
Initially, a large portion of each payment is devoted to interest.
As the loan matures, larger portions go towards paying down the principal.
But what does this mean to you, specifically? When you take out a mortgage (loan) to purchase your property you agree to pay this loan back over a specific term, say 30 years, and this determines the level of regular payments you are required to make each month.
Out of each monthly payment, the lender deducts the interest payment due to them, and applies the remainder to the principal balance which reduces the amount you owe them.
At the beginning of your loan approximately 90% of your monthly payment goes to pay the interest on your mortgage and the remaining 10% of your payment is applied to the balance of the loan.
Did you read that? Ouch! 90% of your monthly payment gets swallowed up in interest, which is the cost of borrowing the money.
No wonder it costs you more than three times what you borrow to pay off your mortgage! (Check this out some time, count the number of payments and work out just how much you will pay over the term of your mortgage!) What compounds this is the fact that the loan balance reduces slowly over time, meaning you continue to pay a high proportion of your monthly payment in interest to the bank.
In fact, it takes you over 250 months to get to the stage where the portion of your payment reducing the principal is greater than the interest cost.
What that means is more than two thirds of your loan term is spent making significant contributions to the profits of the lender, while you struggle to make progress in becoming mortgage free.
And it is this that causes me to believe that Amortization leads to financial death.
There's a great tool I used to make these calculations which you can also use.
Check it out at www.
loanamortizationtable.
net and make your own assessments regarding your mortgage situation.
In all of this I implore you to take some time and understand how Amortization impacts your financial future, because if you do not, there is a very high chance that you will end up having a mortgage much, much longer than you anticipated.
Perhaps even long after you stop working.
The most important point I need to impress upon you is this; Your Mortgage Amortization Schedule is not your friend!