Loan Amortization

 

In simple terms loan amortization is the repayment of a loan. As a matter of fact it is usually used in conjunction with a time frame. To illustrate this point for example, a 30-year loan term amortizes over a 30-year time frame.

The general thumb rule in this regard is the longer the term is for a loan the slower it amortizes. If experts are to be believed this slower amortization means a lower monthly payment. In addition it can also mean more interest paid out over the life of the loan.

Theoretically speaking a typical loan payment involves two components:

First and foremost part of it is the interest payment and of course part of it paying off the principal.

In an ideal scenario a constant payment on a 30-year fixed loan amortization each month over a period of 360 months. More often than not this is normal amortization.

Point to be noted in this regard is that amortization can also work in reverse. Fact remained that minimum payment option loans, such as 1% loans that you see advertised can give a borrower the option to pay less than an interest-only payment (the minimum payment). On the other side of the coin an interest-only payment keeps a loan the exact same size. According to experts it is not being paid off. As a matter of fact ever penny over the interest-only level is used to pay off the principal. In case if you pay less than the interest-only level, then you are actually adding to the size of the loan. On the other hand an increase in loan size is known as negative loan amortization.

More often than not you will see 1% loans marketed under such names as:

Minimum option ARMs

Minimum payment loans

Pick a payment loans

Believe it or not lenders have been experimenting with longer and longer loan terms for mortgages. As a matter of fact first 40-year loan terms were offered. At the moment some lenders are offering 50-year loans.

On the other side of the coin an "amortization schedule," in general, is a record of loan or mortgage payments. Theoretically speaking this record includes the payment number, date, amount, breakdown of principal and interest, and the remaining balance owed after the payment. It is worth mentioning in this regard that an loan amortization periodic repayments contain an amount designated for the reduction of the principal, so that the balance will eventually be reduced to zero. In addition the time necessary for the balance to reach zero is calculated in an amortization schedule.

What is Fixed Rate Amortizing Loans

There is no denying that the monthly payments for interest and principal remain consistent and never change in fixed rates. More often than not the monthly payments will typically be stable even if property taxes and homeowners insurance increase. According to experts in a fixed rate-amortizing loan, the interest rate remains fixed for the life of the loan. Furthermore it is worthwhile remembering that the monthly payments remain level for the life of the loan and are prearranged to pay off the loan at the end of the loan term. In theory an example of a fixed rate loan is a 30-year mortgage that takes 22.5 years of level payments to pay half of the original loan amount.

Importance of Principal and Interest in Amortization Loans

There is no denying that the method in which the principal and interest are applied is very useful to understanding amortization loans. In simple terms for example, in an amortization schedule, the majority of the payment applies to interest early in the loan, with a small amount applied to paying off the principal. Always remember that as the loan matures and there is less principal remaining to be repaid, more of the payment is applied to repaying the principal since there is less interest owed to the lender. In an ideal scenario only a small amount of interest is paid by the monthly payment by the end of the loan, and most of it applies to the principal.

There is no hiding the fact that buying a property is a tremendous wealth building strategy for most Americans. In case if you are not careful, however, the strategy can go bad because of negative amortization issues.

Understanding Negative Amortization and Your Mortgage

Point to be noted in this regard is that the United States has a strong middle class, which makes the country one of the wealthier in the world. As a matter of fact one of the foundational elements of this middle class is homeownership. Simply put, it is worth pointing that homeownership is a method for building wealth via paying off mortgages and realizing gains through appreciation. Theoretically speaking the government realizes this and provides incentives such as capital gains exemptions and mortgage interest deductions to facilitate further growth.

Fact remained that homeownership, however, is not always a slam dunk. In case if you are not careful, you can get into a situation where you are realizing negative amortization and are actually losing money. Theoretically speaking to understand such a scenario, we need to discuss some basics of a loan.

On the other hand in exchange for being loaned money, a lender expects you to make monthly payments against the amount due. In simple terms the repayment of the loan is called the amortization repayment schedule. As is pretty much the case with most loans, your initial payments are mostly applied to interest. Believe it or not this can lead to issues if the loan is too good to be true.

According to experts in a competitive loan amortization market, banks and lenders offer deals that may sound good but can hurt you in the long run. As a matter of fact many of the mortgages that fall in this area involve some variation of payment that does not address all the interest accumulating on the loan. While it is worthwhile remembering that loans come in a wide range of formats, said loans generally are designed for you to pay less than the interest being accumulated on the borrowed amount with the idea you will sell the home in a relatively short period such as a couple of year.

Other Articles

1. equity loan
     In case if you are a homeowner in need of a home equity loan but you have not yet built up any equity in your ho...
2. construction loan
     In simple terms Construction loans fall into the category of financial debts. If experts are to be believed ther...
3. equity loan rates
     Theoretically speaking with hundreds of companies, banks, and other financial institutions flooding our country,...