What Are Amortizing Mortgage Loans?
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by: marciafreeman
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If mortgage loans are new to you, youre probably bewildered by the jargon. One of the more common and confusing sets of terms is "amortizing" loans versus "non amortizing" loans. The meaning of "amortizing" is simple: To amortize is to pay off a loan with regular payments that cover both the interest and the principal, and which completely pay off the loan by the end of the agreed term. But how does that translate into the terms of a mortgage?
Amortizing Mortgage Loans
* The monthly payments cover all of the interest accrued during the billing period, plus part of the principal.
* The payments cover the entire cost of the loan, paying off the loan gradually.
* For fixed rate loans, the interest rate and the size of the monthly payments stay the same throughout the term of the loan. Because the interest rate for adjustable rate loans fluctuates, the size of the monthly payments fluctuates proportionately.
* Amortizing loans often have higher interest rates than non amortizing loans when the amortizing loans standard interest rate is compared to the non amortizing loans interest rate during the grace period.
* Designed for homeowners who plan to own the property long term.
Non Amortizing Mortgage Loans
* Monthly payments cover only the accrued interest, or may cover even less than the total accrued interest and allow interest to compound.
* Payments are not designed to pay off the entire mortgage loan gradually over the term of the loan. Once the grace period ends, the entire loan may come due, or the payment schedule may accelerate abruptly.
* May be either fixed rate or adjustable rate. Just as with an amortizing loan, the size of the monthly payments either varies or stays the same. However, you should take into account the effect of the grace period upon the interest rate.
* Interest rates are often considerably lower than interest rates for comparable amortizing mortgage loans during the grace period. However, once the grace period ends, interest rates are frequently much higher than those of similar amortizing loans.
* Intended for borrowers who plan to refinance during the grace period. Non amortizing loans are frequently the mortgage type of choice for people who "flip," or renovate and resell, houses, and are a temporary solution for people who are having financial problems and need lower mortgage payments for a few years. Articles Mortgage loan | Refinance | Equity loans | Loans |
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