What Is Amortization?

What Is Amortization?

Written by Caitlin Wood
Last Updated December 22, 2014

Making the decision to invest in a house is probably one of the biggest and most important life decisions you’ll make. But unfortunately it’s nothing compared to the decisions you’ll need to make about money. Determining exactly how much money you can afford to spend on a house can be extremely difficult and stressful, you’ll want probably want a house that’s big enough for your family to grow but at a price that won’t plummet you into debt.

The two main issues you’ll need to consider are how much of a down payment you can realistically afford and the size of your monthly payments. You should definitely decide this before you start looking for your dream home, knowing your budget will prevent you from falling in love with a house that’s out of your price range. A big part of the home buying process is trying to keep up with your real estate agent and understand all the complex terms they use; especially when money is being discussed. One term that most people don’t quite understand is amortization. When money is involved this term is extremely important, here’s everything you should know about amortization and how it will affect your home buying process.

What Does It Mean?

In terms of your mortgage, amortization is the method through which you pay for your house. You make monthly payments to repay your debt (principal and interest) over the agreed upon term of your loan. A mortgage is an amortized loan which means that each monthly payment that you make will be identical but the amount of interest you have to pay decreases each month while the principal increases. During the first several years of your mortgage’s term you’ll be paying almost all interest and by the end of your term you’ll be paying off the principal.

How Will Amortization Affect You

It’s important that you’re smart about your mortgage and carefully determine how much you can actually afford to pay each month. If you can only afford a small monthly payment then your mortgage amount needs to reflect this. Because the amount of money devoted to interest and principal chances with each monthly payment, you’ll end up paying off your interest before the principal. What this means for you is what you won’t be gaining equity on your house as fast as you think. During the initial years you’ll be gaining almost no equity but that will change as time passes and by the end of your mortgage you’ll gain equity rather quickly.

Amortization is a really big component of the mortgage repayment process and most people either don’t know it exists or don’t bother to fully understand it. If you’re looking to refinance your mortgage then amortization is extremely important. You’ll need to compare your amortization schedule (a list of each month’s mortgage payment categorized by how much goes towards interest and principal and then the remaining unpaid principal after each month’s payment), before you decide if refinancing is a good idea. Carefully looking over your amortization schedule can be an eye opening experience, you see firsthand exactly how much interest you’re paying and how many years it’ll be before you actually start paying off the principal of your loan.

Do Your Research

As with any financial decision it’s important that you do your own research and take responsibility for understanding all the terms and requirements associated with the process. Purchasing a house is a complicated process, so don’t be afraid to ask questions and make sure you know what’s going on before you sign on the dotted line.


Rating of 5/5 based on 3 votes.

Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Make Smarter Borrowing Decisions

Whether you have good credit or poor credit, building financial awareness is the best way to save. Find tips, guides and tools to make better financial decisions.

Industry Spotlight

What's happening with Canada's credit industry?

goPeer — Helping Consumers Achieve Financial Freedom by Connecting Canadians Looking For Financing With Canadians Looking to Invest

goPeer — Helping Consumers Achieve Financial Freedom by Connecting Canadians Looking For Financing With Canadians Looking to Invest

goPeer is Canada's first consumer peer to peer lending platform and connects creditworthy Canadians looking for a loan with everyday Canadians looking...

Read Post
Locator
Find The Best Rate
In Your Region
OR
Best Personal Loan Provider by Greedy Rates
Icon

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Keep Track Of Your Credit Score

Subscribe with Credit Verify to monitor your credit rating and get your free credit score.