The amortization effect of a mortgage is, perhaps, the most overlooked factor looked to by potential buyers who are planning to assume the vendor's mortgage.

Buyers will look at the rate, the total payment, how long remains on the term, etc. In fact, it is likely that the agent looks to the same thing. This is only natural because the amortization is hard to figure out and is not really understood.

This can be a potential mistake because of the fact that mortgages are amortized and that the proportion of your payment that goes to principle versus interest changes as time passes.

Whether you are a potential buyer or the real estate agent of a potential buyer, you must understand this factor in order to fully appreciate its importance. In fact, even a slight difference in the proportion could either put money in your pocket or take it out.

How does amortization work?
Mortgage payments are broken down into principal payments and interest payments. Because they are calculated on a declining balance basis, the percentage of principal you pay to interest increases as you move further into your mortgage.

When you first start your new mortgage you are paying a higher proportion of interest as a percentage of your monthly payment than you would be paying even 1 year in the future. The higher the proportion of interest you are paying the lower the proportion of principal. This is why any principal repayment in the first years of your mortgage makes such a big impact on the mortgage life.

Let's use an example of a mortgage that is $150,000 at 8% interest for 30 years. In month #1 you are paying:

Example 1:
$150,000 at 8% interest for 30 years - Month 1 Payment

Principal	Interest	Balance of Mortgage
$100.65	$1,000.00	$149,899.35

With principal as a % of Monthly Payment = 9.144337%

However, using the same basic mortgage information, here are the results in month 12 even though you are paying exactly the same each and every month:

Example 2:
$150,000 at 8% interest for 30 years - Month 12 Payment

Principal	Interest	Balance of Mortgage
$108.28	$992.37	$148,746.95

With principal as a % of Monthly Payment = 9.837728%

You can see from this study that the payment remains the same but the total amount you are putting to your mortgage as principal increases each and every month. This essentially means that you are reducing your mortgage faster with each and every payment as time passes.

How does it impact an assumption?
The important point that comes from this understanding is that one of the factors that you should be considering is the actual amortization of the mortgage you are looking to assume.

This is absolutely vital when you are trying to compare 2 virtually identical mortgages. Most people who are looking for an assumable end up looking for a mortgage to assume that meets their monthly budget and which meets their cash downpayment. Naturally, this means that they are looking at very similar mortgages.

But, let's assume that the mortgages you are comparing are virtually identical mortgages with similar payments, similar cash to mortgage totals and identical interest rates. The only major difference between them is that 1 of the mortgages has 28 years left and the other has 26 years. Both mortgages have been locked in for a rate term of 5 years or more so the interest rates expirations are not as important a factor.

With this scenario, the importance of understanding the amortization effect is vital because it will ultimately mean dollars in your pocket down the road. Here's why:

Example 1:
$150,000 at 8% interest for 30 years with 28 years left

Payment	Principal	Interest	Balance of Mortgage
$1,100.65	$118.05	$982.60	$147,271.86

Example 2:
$150,000 at 8% interest for 30 years with 26 years left

Payment	Principal	Interest	Balance of Mortgage
$1,100.65	$138.46	$962.19	$144,190.10

The important thing to note here is that you would be saving another $20.41 minimum each and every month that you pay the same amount as a mortgage payment. This results in a extra buildup of equity of well over $1,200 in the 5 year period which means $1,200 extra in your pocket if you decide to sell after 5 years!

Conclusions
Because a mortgage is essentially a savings plan, adding more equity each and every month is very positive. Besides helping you when you go to sell the home there are also the intangible effects of increasing your net worth and making you more attractive to financial institutions. This is why the amortization is important when you assume a mortgage.

Of course, like any potential situation, there are a number of variables that impact this scenario including the purchase price, the cash to mortgage, the rates, etc. Your understanding of these as either the owner or agent of an owner is absolutely vital.

However, it does show that the remaining life of the mortgage should be, and is, a vital part of the equation. Failing to take this into account could cost you money each and every month that could be put against the principal of your mortgage and not towards the interest bills.

This Article is intended solely for reference and is not intended to give any advice whatsoever relating to tax. This is not to be relied upon for tax advice. You must consult a tax practitioner in your geographic area for advice relating to real estate investment and selling.