Amortization is the process of paying down the principal balance of an asset over time. Most mortgages amortize monthly and have an interest rate applied to the remaining balance, which is included as part of the payment due each month. This process is one of the most important factors in determining the overall price a borrower will pay for a house.
Understanding how a mortgage will amortize over the life of the loan can lead to saving a substantial amount by the time the loan is fully repaid. Monthly or “Mortgage-style” amortization refers to the most common method for applying interest to a home loan when payments are made monthly for the duration of a loan. “Straight-line” amortization represents the process of paying down the principal daily with interest applied to a constantly decreasing amount.
How Monthly Amortization Works
For example, assume a borrower bought a home for $100,000 with a 30-year mortgage and an interest rate of 4.5%. The first payment due would be in the neighborhood of $506, with the principal payment being $131 with the interest being $375. If the payment schedule is monthly, the subsequent interest payments will only slightly decrease over time due to the fact that the remaining balance remains relatively high. At this interest rate, the borrower can expect to pay nearly $5,000 worth of interest within the first year of repayment.
When a loan is amortized daily, the principal decreases at a faster rate, leaving a smaller remaining balance for the interest rate to be applied to. This is because payments are being made daily, not monthly.
For example, if the same loan with a principal of $100,000 is paid down daily at a rate of approximately $4.30 a day, the correlating amount of interest would be about $12.30 a day with the amount of interest only decreasing by 2 cents by the end of the first month. But because the principal is decreasing daily, the interest rate is constantly being applied to a lesser amount.
By the end of the first month of repayment, the principal payment in this case would total roughly $129.77 with a total of $369.63, with a total of $499.40 due by the scheduled payment date. While the total difference between the monthly and daily amortization schedule is just over $5, this difference can add up to a much larger sum over the course of a 15- or 30-year mortgage.
Daily and Monthly Amortization Schedule
Borrowing with Tellus
Unlike standard mortgage payments, Tellus home loans are repaid on the basis of daily amortization, which is unique as it saves the borrower money over the course of the loan. Interest rates are based on the loan-to value ratio of the mortgage and can be as low as 3.0%. While loans with Tellus are treated as if they’re repaid daily, borrowers are only required to make payments once a month. Ultimately, this results in lower monthly payments.
In addition, Tellus doesn’t impose any penalties or fees for the early repayment of a loan – giving the borrower the flexibility to modify the schedule of the payments if they desire. This method of lending allows homeowners to access their equity with practically no risk of incurring additional charges and reduces the ending balance that a borrower would have to repay compared to that of a conventional loan.
Taking advantage of a lesser known option such as a mortgage that is amortized daily can save you a lot of money over the lifespan of a loan. Although finding a lender that offers loans that are amortized daily may be a bit tougher, it’s not impossible. Tellus loans are designed to make home loans more accessible while saving the borrower money.