Amortization is a term used when the owner of a property is paying off a debt in equal installments. A portion of the payment will cover the loan principal whereas the other will cover the interest. By using this method, the borrower is able to pay the interest while building equity in the property.
How does amortization works?
When you are approved for a loan, you will have a payment schedule from your lender. The schedule will illustrate how much money you will be paying on the principal and interest over time.
By using the amortization technique, the amount going toward your principal will start small and increase as you pay off the loan. At the same time, the interest payments will do the opposite. That is, the interest payment will start high and get smaller and smaller over time. This technique applies to fixed-rate mortgages or loans.
What are the benefits of amortization?
Amortization will help you build equity in the property ahead of time. This is important because you can use this equity you built to refinance your property.
The other benefit is that your expenses are also tax deductible in the current tax year.
Sources:
