Mortgage amortization refers to situations in which the balance of the mortgage principle declines with time while the mortgage holder makes payments periodically. In general, mortgage amortization is something to look forward. If the mortgage doesn’t amortize, the borrower makes no progress toward paying off his/ her loan. Historically, mortgages used to amortize automatically when the borrower was able to meet the monthly payments. Negative amortization mortgages, interest rate mortgages, and adjustable rate mortgages have been used as well.

When one’s application for a mortgage gets approved, the creditor determines the payment amounts to be made periodically over the term of the loan. All periodic mortgage payments have to cover the interest in full, including a portion of the mortgage principal. The aim is to have the mortgage amortized which means that it is paid off in full at the end of the loan’s term.

If mortgage amortization does not occur, the loan payments are adjusted so that the holder pays against the mortgage principal. This may come as a surprise because the payment amounts will suddenly increase.

While amortization accounting is not simple, mortgage holders should know that amortization goes at a slow pace in the beginning. In the initial years of the mortgage loan, most of the payment amount is used to cover the interest. A small portion of it goes against the principal. The interest will decline when most of the principal is paid off. This leads to greater mortgage amortization during the last couple of years of the loan’s term. While the debt amount decreases, the borrower’s equity in the property increases.

And precisely because amortization accounting is complicated, many banks are not flexible when it comes to payment amounts. Some institutions charge penalties if one overpays on a monthly basis, trying to pay off the mortgage quicker. Others will accept overpayments, deducing them toward the term of the loan, and the borrower will not be allowed to skip the next payment. Rather than that, the total amount of the payment is reduced, and the loan’s life is shortened. Persons who pay over the minimum every month have higher chances of finding creditors that permit this practice.

Amortization schedules are employed for long-term loans such as personal loans, car loans, and mortgages. The aim of using such schedules is to account for the compounding interest over the term of the loan. Most lenders use computer programs for the purpose, though the bi-weekly schedule can be computed by hand. Online calculation tools, such as mortgage calculators, also come handy when figuring out various repayment schedules.

Basically, mortgage amortization is the reduction of the mortgage balance or the amount still owed to the creditor. Negative amortization occurs when the payments over a period of time are less than the interest being charged over the same period. In this case, the outstanding balance on the loan will increase. The difference between the payment and interest, or the shorted amount, will be added to the outstanding balance. This type of practice should be agreed with the creditor before shorting or the borrower may default on his/ her payments. Negative amortization may be employed in the initial period, before the payments are larger than the interest, making the loan self-amortizing. This term is most widely used for corporate loans and mortgage loans. Corporate loans of this kind are referred to as payment in kind or PIK loans.