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.
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
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
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
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.
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