Be an impressive borrower and understand your amortization schedule. Understanding the amortization schedule from a home loan adviser or expert may be good idea.
SUKANYA KUMAR Founder & Director, RetailLending.com | Oct 16, 2014, 12.08 PM IST | Moneycontrol.com

Many borrowers draw a great big question mark when asked to segregate the amount of principal and interest they have paid back so far. The answer that this information can easily be understood through the amortization schedule of your home loan throws up an even bigger question mark ‘What is an amortization schedule?’ There are great benefits to understanding the amortization schedule and its application, and it is surely to make anyone an impressively smart borrower!

Every time a borrower pays an EMI, a portion of the EMI goes towards the principal amount borrowed and a portion towards the interest component. The table that enlists this segregation on a month-to-month basis is called an amortization schedule. An amortization schedule will easily demonstrate how a larger portion of your EMI goes towards the interest component in your preliminary payments, while a larger amount of the EMI will go towards your principal amount of the loan during the end of your loan tenure.

It may seem that this information may not be important to the borrower and is essentially a calculation the bank initiates, but this is a dangerous assumption. Understanding the amortization schedule can help the borrower to a great extent. Let’s take a look at the questions an amortization schedule can answer.

How much of your home do you own?
In the initial part of your tenure, the EMI paid goes against a larger amount of your interest component than your principal amount. This means you are paying off more of the interest you owe on your loan rather than amount of loan you took to buy your home. As your tenure nears the end, your EMI will bite off a larger part of the principal amount. The amount of principal you have paid at any time during your tenure is essentially the amount of equity you own of the property. An amortization schedule can help you to understand how much of you home you really own at any given point of time!

Is refinancing your home loan worth it?
Sometimes during the tenure of a mortgage, borrowers may consider refinancing their home loan, but a major concern they face is to understand if it will be beneficial in their situation. One will never understand this subject until they analyze the amount of principal paid, interest component paid, and loan tenure. All of this information can be easily identified from your amortization schedule.

How much money will I get if I sell my property today in the middle of the home loan tenure?
When a borrower sells a property mid-tenure, the new buyer or his lender usually makes two payments one to the bank of the old buyer to foreclose the old loan and the other to the previous owner of the house. The amount of money the old owner of the home will get will be decided upon the actual equity of the home he owns. Again, an easy one for the amortization schedule!

An amortization schedule can be an extremely important tool and can help build clarity in any borrower’s mind. There are only a few online financial information platforms such as RetailLending.com that offer an amortization calculator and can help any borrower draw up their amortization schedule at a drop of a hat. Just by plugging in your principal, loan tenure, and interest rate, an amortization calculator will display the entire table of your EMIs. It is important to understand, though, that amortization tables displayed from any calculation tools are indicative and the amounts may slightly vary due to rounding and accumulated errors which are balanced at the end of each financial year.

The amortization tool is only as good as how well the borrower understands it and can apply it for making smart decisions regarding their mortgage and property. Understanding the amortization schedule from a home loan advisor or expert may be good idea as the schedule can get a bit complicated at times, and you would not want to take a wrong decision due to misanalysis of your amortization schedule. Even then, just knowing the benefits and importance of the schedule will set you head and shoulders above the rest. So calculate away and become an impressive borrower!

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