Eligible military service members who are able to take advantage of the benefits offered by the VA loan program will also want to be aware of their loan repayment schedule. When calculating this total, there are two primary financial pieces to consider: the principal (the amount borrowed) and interest (the fee you are charged for borrowing on a loan). The process of paying off these debts in installments over a period of time is known as amortization.
The majority of initial monthly payments are applied towards paying off the interest on a loan. Over time as payments are made regularly, less of your monthly payment is allocated towards paying off interest decreases on fixed-rate loans. In turn, this allows for a larger portion of your monthly payment to go towards paying off the principal balance on a loan.
An amortization calculator is a useful financial tool that will give you the figures to help clarify the relationship between how much interest you owe compared to how much principal remains to be paid on a loan. With these values in mind, homeowners can determine how long it will take to repay their own and come up with a plan of action that will put them in a better position financially.
What is an Amortization Calculator?
Amortization calculators can also be called amortization schedule calculators because they show you the timeline of what paying off your loan looks like. They calculate how much of your monthly payment is applied towards the interest on your loan versus the remaining principal balance on your loan using specific input variables. Amortization is calculated using the formula below:
Let’s take a closer look at how these inputs individually affect how amortization is calculated.
M. M stands for your monthly mortgage payment. This total is calculated by inputting principal, interest, taxes, and insurance into the equation above.
P. P represents the principal amount you owe on a loan. The principal is the amount a homeowner borrows from a lender and agrees to pay back. An amortization shows homeowners how they can create more favorable conditions financially when they make extra payments to reduce the principal on a loan.
r. r represents the interest rate on a loan and is influenced by the rate set by your lender as well as the term on your loan. Mortgage type also factors into the equation, depending on if you have a fixed-rate mortgage or an adjustable-rate mortgage (ARM). You can see how your interest rate is calculated each month by dividing the total amount for the year by 12 (since there are 12 months in a year). For example, if your interest rate for the year is at 4%, the amount you pay each month is 0.00333333333 (.04/12 =0.00333333333).
n. n stands for the number of payments made over the life of your loan, which is typically set at intervals of 15 or 30 years. It is calculated by multiplying the number of years in your loan term by the number of monthly payments. For a 15-year loan term, it would look like 15 x 12 which brings you to a total of 180 monthly payments made over the life of the loan. To determine the amount for a 30-year mortgage term, you can simply double this amount to get 360 monthly payments (12 x 30 = 360 or 2 x 15 x 12 = 360).
Calculating your principal balance and interest rate with an amortization calculator is a meaningful tool that breaks down what is included in your monthly payments. VA loan beneficiaries should be aware that amortization calculators do not include all of the costs that affect your monthly payment. Homeowners insurance, private mortgage insurance, property taxes, the VA funding fee, and other fees will also affect how your monthly housing expenses are calculated.
How Can Calculating Amortization Help Homeowners with Their Monthly Payments?
A mortgage amortization schedule provides a clear visual for homeowners by breaking down their monthly payments into two categories. It shows homeowners how much they have left to pay on their mortgage and shows them how much they’re paying toward interest. Keeping tabs on these amounts gives homeowners a more tangible picture of their financial location, allowing them to make informed decisions that will put them in a better position financially.
With this information, homeowners can create a financial plan of action regarding their monthly payments. An amortization calculator can be used to help determine if refinancing at a lower rate is financially beneficial to them. They can calculate the total savings made possible by shortening their loan. Lastly, knowing how much you’ve paid on the principal of your loan can also help determine how much built-in equity you’ve accrued, while can then be used for a cash-out refinance, debt consolidation, or home improvement project.
How Do Extra Payments Affect Your Amortization Schedule?
Ultimately, homeowners can save money by paying less interest over the life of the loan when they make extra payments. It is important when making extra payments to specify to your lender that they are applied to the principal balance on your loan. Otherwise, those additional payments will be applied to paying off the interest on your loan. Consult with your lender to find out if there is a fee for paying off your mortgage earlier than the set term.
Because interest is calculated at a compounded rate, focusing on lowering the principal lessens the source of what that interest feeds off of. One way homeowners can put themselves in a better position financially is by paying a little more each month towards their monthly payments. How much more you should pay each month depends on your unique financial position. Homeowners can create a consistent payment plan or goal by making smaller payments each month that will eventually add up to a “13th mortgage payment.” A lump-sum payment is also a great option if you have received a sizable chunk of cash.
How Can Hero Loan Help?
Hero Loan is dedicated to providing our veterans, military service members, and their families with the tools necessary to make a sound decision when it comes to making monthly payments. We are proud to support veteran-owned businesses and events to give back and show our appreciation for their service commitments. Using an amortization calculator is a great jump-off point when it comes to determining your monthly payments. Consulting with our team of neighborly lending experts is a sure way to communicate your financial goals when it comes to creating a monthly payment plan that best suits your financial needs.
With our streamlined, in-house underwriting process, we can expedite your loan’s approval while relieving some of the stresses of cumbersome paperwork. Our customer-centric approach gives VA beneficiaries a personalized experience, assuring our military service members and veterans they are in good hands when creating a financial plan of action that will get them into the home of their dreams.
Call us today at (866) 222-1750 to find out more about how your amortization schedule affects your monthly payments. We can also be reached through our online chat service at any time.