What is Loan Amortization?
I keep getting hits for this, so people must want it explained. Loan Amortization is nothing more than the process of paying the loan off by regular payments over time. Leave it to the experts to come up with a fancy word for an everyday process, eh?
A loan which is fully amortized (or fully amortizing) is one which the required payments will pay it off in full by the end of the term of the loan. Fixed rate loans are the classic example of this. A thirty year fixed rate loan has 360 payments of equal amount, at the end of which the loan will be paid off, assuming you have made all the payments on time. The last payment may be somewhat smaller due to the fact that they may round the payment up to the next penny, and over thirty years it makes a difference.
However, most hybrid ARMs are also fully amortizing loans. The difference between these and the fixed rate loan is that the rate, and therefore the payment, is fixed only for the first few years, and after that the rate varies based upon an underlying index. Nonetheless, the loans are still calculated to pay off the entire balance by the end of the loan. You are welcome to keep them after the fixed period if you want to, but few people do.
Balloon loans are partially amortized. Their payments are calculated as if they were a longer loan than they are. Because they amortize based upon a longer loan period, the regular payments do not pay the loan off in its entirety by the end of the loan. Unlike the hybrid ARM, these loans are over in a shorter period of time, and you do not have the option of keeping them. You must either pay the loan off, whether by paying it or by refinancing, or sell the property.
I don't see it in a federally approved list of loan terms, but I have heard interest only loans called delayed amortization. These loans, whether fixed rate or hybrid ARM, have interest only payments for a given time, and then amortize over the remainder of the loan. For instance, a five year interest only loan is then paid off (amortized) over the remaining twenty five years of the loan. Note that when they start to amortize, they will then have payments that are higher than the equivalent fully amortized loan, because the balance is paid off over a shorter period. They will also typically carry a higher interest rate (most subprime lenders charge 1/4 percent higher interest rate for an interest only loan, and there are additional limitations on availability).
If there were such a thing as an interest only loan that stays interest only until you refinance, it would be an unamortized loan. Years ago, I was invited by a company to take a seminar because they offered these to financial planners clients. Fortunately, when I checked NASD regulations, I found out that what they were trying to sell was prohibited. The interest rates they were talking about were very high as well. The reason I said "fortunately" about finding out NASD regulations prohibited what they were doing is that I later found out that they were a scam and shut down by the regulators. I might have found out had I done all my due diligence, or it's possible I might not have. Either way, I'm glad I didn't have any clients with them.
Finally, there is the negative amortization loan, where if you make the minimum payment your loan balance actually increases, effectively digging yourself deeper into whatever hole it was that motivated you to do it. There are circumstances where they are the best thing to do given the situation, but in my opinion, (at least for owner occupied property) it should be a temporary solution of last resort.
Caveat Emptor
Categories
Beginner's InformationBuy My Science Fiction Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read
Links to free samples here
The Man From Empire
Man From Empire Books2Read link
A Guardian From Earth
Guardian From Earth Books2Read link
Empire and Earth
Empire and Earth Books2Read link
Working The Trenches
Working the Trenches Books2Read link
Rediscovery 4 novel set
Rediscovery 4 novel set Books2Read link
Preparing The Ground
Preparing the Ground Books2Read link
Building the People
Building the People Books2Read link
Setting The Board
Setting The Board Books2Read link
Moving The Pieces
Moving The Pieces Books2Read link
The Invention of Motherhood
Invention of Motherhood Books2Read link
The Price of Power
Price of Power Books2Read link
The End Of Childhood
The End of Childhood Books2Read link
Measure Of Adulthood
Measure Of Adulthood Books2Read link
The Fountains of Aescalon
The Fountains of Aescalon Books2Read link
The Monad Trap
The Monad Trap Books2Read link
The Gates To Faerie
The Gates To Faerie Books2Read link
Gifts Of The Mother
Gifts Of The Mother Books2Read link
The Book on Mortgages Everyone Should Have!
What Consumers Need To Know About Mortgages
What Consumers Need to Know About Mortgages Books2Read
The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
What Consumers Need to Know About Buying Real Estate Books2Read
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.
Leave a comment