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Discuss mortgage loans in terms of the time value of money and loan amortization. What important points should every homeowner know about how mortgages work? (Hint: Think about taxes and getting the mortgage paid off.)

Accountants use discounting and compound to calculate the time value of money. Discounting entails computing the present value of money that could be received in the future while compounding entails computing the future value of the investment presently made. Based on the time value of money, Pinkowish (2011) claims that mortgages are annuities because all repayments are designed to secure the principal and interest accrued throughout the preceding month. Hence, the present value of the mortgage entails all payments necessary to settle the full agreement.

Mortgages with longer repayment schedules give less interest to the lender due to amortization. Through amortization, the debtor sees his or her mortgage reduce gradually by making periodic payments throughout the life of the loan. Initially, the repayments contribute less to the principal. The interest for a mortgage is calculated using the outstanding balance, which reduces on a monthly basis. With time, more repayment money starts settling the principal as the interest payable for the outstanding loan continues reducing especially during the second half of the loan’s life.

A recent home buyer needs to conduct research to understand the loan process fully. In particular, the homebuyer must understand the frequency of the interest accrual. In addition, he or she must understand the escrowing taxation. Knowing and understanding the homeowner’s insurance, mortgage insurance, and the overall distribution of repayments is vital if one wishes to manage the mortgage better (Breyer, 2016). Some homeowners opt to repay the mortgage faster than stated in the agreement making double payments on a monthly basis.

References

Breyer, A. (2016). How to Be Debt Free: A simple plan for paying off debt: car loans, student loan repayment, credit card debt, mortgages, and more (3 ed.). Amazon: CreateSpace Independent Publishing Platform.

Pinkowish, T. J. (2011). Residential Mortgage Lending: Principles and Practices (6th ed.). New York: Cengage Learning.

by EssayRoyal, Dec. 7, 2019, 7:14 p.m.

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