Amortization
Ordinarily, when you get a mortgage, your monthly payments are a combination
of interest and principal. Principal is the amount you actually borrowed.
In the early years of a 30-year mortgage, you pay almost entirely interest—which
gives you a nice big income tax write-off.
As time goes on, depending on your loan’s amortization schedule, more
of your payment applies to the principal.
However, many consumers have opted to take a different route. In an effort
to keep their monthly payments lower, many people take out an interest only
loan. In this case, you do not pay down the balance on the loan at all.
If the real estate market is flat in your area, then the big drawback to
an interest-only loan is the fact that you do not build up equity in the house.
However, in areas where real estate values are climbing rapidly, you can build
up equity simply through your home’s appreciation.
Next: Paying Points |
