# How Monthly Payment Is Amortized

<i> Campbell, a retired Times staff writer, now is a Phoenix-based free-lance writer</i>

QUESTION: How do the loan or mortgage people determine how much is to go to principal and how much to your interest? When I get my statement for the year, almost all of the payment has gone to interest.

ANSWER: The principle behind the amortized mortgage is simple. Over the 20- or 30-year life span of the mortgage, the amount going to principal each month goes up slowly and the amount going to interest goes down so that at the end of 20 or 30 years, the debt is paid off.

Amortization came in after the Depression in the ‘30s because until then, most home financing was pretty rudimentary. Normally, after making a down payment, you paid an interest-only loan for about five years and then refinanced for another five years and so on.

Unfortunately, in all too many cases, it meant that 10, 15 or 20 years down the road, the homeowner had virtually no equity in his home and was facing one big balloon payment he couldn’t make. Foreclosures swept the country.

In theory, amortization gives the homeowner a chance to establish some equity, no matter how tiny, right from the first payment.

But the arrangement is skewed in the lender’s favor, with the lion’s share of the monthly payment going to the lender’s interest and a fraction of it going to the reduction of principal.

On the typical 30-year loan, you’re well into the 25th or 26th year before half of your payment is going to the reduction of principal. Basically, even for someone like me who moves his lips when he counts, the mathematical principle of the amortized loan isn’t all that complicated.

But the trouble with it is that the computation has to be done every month. A 30-year mortgage is a 360-payment note the first month. The second month it has to be recomputed as a 359-payment instrument, and so on. Fortunately, the computer came along to save the lenders from a lot of eye strain.

Let’s take a brief example of how the interest rate affects the amount of the payment going to principal.

With a \$60,000-, 30-year mortgage at 10%, \$26.54 of the first month’s payment of \$526.54 is going to principal (equity buildup). At 10.5%, the monthly payment goes to \$548.84, but the amount going to principal (\$23.84) shrinks quite a bit. At 11%, the payment goes to \$571.39 a month, but the principal payment drops to \$21.39 and, at 11.5%, with a \$594.17 payment, a negligible \$19.17 a month is going to equity buildup. Discouraging, isn’t it?

What to Do When a Mortgage Is Paid Up

Q: Could you please send me any information you have on what to do when you come to the end of your mortgage payments? I need to know what documents to expect from the mortgage company.

A: What do you do when you finish making your last mortgage payment? You crack open a bottle of champagne, of course.

You raise a good point, though, because in far too many cases the homeowner, once he receives the reconveyance deed from the mortgage holder, will simply put it in his safe deposit box and forget about it.

State laws vary, and instead of getting a reconveyance deed you may simply get the original of the debt document with the date, the signature of someone representing the mortgage holder and a notary’s seal and signature. Or, it may be a “Release of Mortgage” form or a simple “notice of payment in full.” But most states require that the document be sent to you in some stated time--a month or six weeks.

However, it is up to you to see that the document is recorded with the county clerk. Otherwise, snug in your safe deposit box, or not, it’s going to show up as a lien on your property.