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The traditional loan is a falling debt, rising equity loan while the reverse mortgage is a falling equity, rising debt loan. In other words, as you make payments on a traditional loan, the amount you owe is reduced, and therefore the equity you have in the property increases over time.
Figuring out what you owe on your mortgage can be very difficult, especially when you likely have to go in circles with your loan servicer to get a competent person to answer the phone with regard to how your mortgage payments work.
How do mortgage repayments work? For most of us, buying a property will involve taking out a mortgage. It’s one of the biggest loans we will take out, so it’s really important to understand just how your repayments work and what your options are for reducing them.
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While the majority of homeowners make mortgage payments on a monthly basis, some lenders will offer the option of biweekly mortgage payments. This involves dividing the typical monthly payment in half and making a half-payment every two weeks.
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You essentially have two different things that you need to pay off when it comes to your mortgage – the sum you have borrowed, referred to as the ‘capital’, and the interest charged on that loan. With a repayment mortgage, your monthly payment is made up of two different parts. Part of the monthly payment will go towards reducing the size of your outstanding debt, while the rest will go towards covering the interest charged on that debt.
The process of making mortgage payments to reduce both your principal and interest until both are 0 is called amortization. Your mortgage payment is the same every month unless your interest rate changes, but the parts of your mortgage payment that goes toward your principal and interest charges changes the longer you have the mortgage.
Your mortgage is made up of the capital – the amount you’ve borrowed – and the interest charged on the loan. With most mortgages you pay off the capital and interest monthly over 25 or 30 years, which is why they’re called repayment mortgages. In the early years, most of your payments go to paying off the interest with a smaller part reducing the capital.