Amortization and Family Law

The world of law frequently intersects with the world of finance. Although it may not seem like it, this intersection also includes family law. Income is almost always a factor in any type of financial support case. Valuation is critical to property distribution. Family law attorneys need to be financially literate to understand this intersection. Part of understanding is vocabulary. It may seem elementary, but vocabulary is often the first and biggest hurdle to becoming financially literate. Many simple concepts are often concealed behind terms of art that are not in common spoken English. One such concept is paying back a loan, a.k.a. amortization.[1]

The word “amortization” has its roots in Latin and, yes, it has the same root word as mortuary, mortician, and mortgage: “mort” meaning death. When a bank loan is initiated, the bank sets a date by which you should pay the loan back and an interest rate for lending you the money. Thus, payments are made for both the principle (the amount borrowed) and the interest. Amortization is just a fancy word for payment of a loan over time. In a sense, amortization outlines the death of a loan.

Lenders will provide you with an amortization schedule that details when payments are made, and how much each payment will contribute to principle and how much to interest. Typically, the early stage of paying back a loan will contain more interest. The formula begins with the outstanding balance, multiplied by the interest rate, and divided by payment period (months, weeks, etc.). Then that number becomes the amount paid for interest, and the remainder of the payment amount goes towards principle. So interest decreases as time passes. There are many calculators that help determine monthly payments based on the date the loan is supposed to be fully paid back.

For example, suppose a client has finished with equitable distribution and needs to buy a new home.[2] If the home she wants to purchase is $300,000, and she is able to pay 20% as a down payment, how can we determine her monthly expense for a mortgage? First, 20% of $300,000 = $60,000 down. Therefore the loan would be for $240,000. Let’s say that her credit is excellent and her interest rate is 3% for a 30-year loan or 2.3% for a 15-year. (See attached schedules.) Notice that interest payments decrease as time goes on. This is because the principle is decreasing as time goes on. Amortization schedules are helpful to determine the monthly expense for living arrangements. That expense may come in handy for later parts of divorce proceedings.

[1] Amortization actually has multiple definitions depending on which field of finance you are in, but for the purposes of this post we mean money lending.

[2] Or if one spouse received the marital residence with an obligation to refinance the mortgage to remove the other spouse as an obligor.

Amortization Schedule 30 year.

Amortization Schedule 15 year.