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Amortization: When Will Your Mortgage Die?

Amortization - How Loans Are Paid Over Their Lifetime

Amortization – How Loans Are Paid Over Their Lifetime

Orange County, CA – Amortization is based on the Latin word ‘mort’, meaning ‘death’. It’s essentially “the scheduled time at which your mortgage will die”. There are several standard variations of amortization, including:

  1. Principal and Interest
  2. Interest Only
  3. Neither Capital Nor Interest (“Reverse” mortgages)
  4. Partial Capital and Interest (“Balloon” payments)

Principal and Interest

This is your standard, every-day mortgage that most commonly will feature an amortization period 15 or 30 years from the date of purchase. Under this kind of amortization, each payment goes in part toward the interest, and in part toward the principal of your loan. The ratio of interest/principal is determined in such a way that payments remain constant across the lifetime of the mortgage. But at the end of that period the loan has been paid in full.

Interest Only

In this form of mortgage, the only payment the buyer makes is the interest that the loan generates each month. No principal is paid. Selecting an interest-only loan keeps the monthly payment lower than a principal and interest loan. The gamble here is that you’re not reducing the balance of the loan. This can be a great tool for those that have definite ownership periods or a detailed financial plan and the discipline to see it through.

Neither Capital Nor Interest (Reverse Mortgage)

The owner makes no payments whatsoever. These loans are only made to those 62 years and older who have equity in their home. The borrower makes no payments, and with enough equity, can even receive monthly payments until death. This is similar to an annuity. Upon death the estate is charged with paying off the loan. Most commonly the estate will either sell the property or refinance the loan.  

Partial Capital and Interest

This is like the standard Principal and Interest mortgages, but the mortgage comes due in full before the capital is paid off, and whatever remains of the capital must be paid off at the amortization date. This is the origin of the term ‘balloon payment’. Essentially, the buyer and lender work together to decide what kind of balloon payment the buyer will be able to afford at the amortization date, and the monthly payments are calculated to bring the principal down to that amount by that date.

Negative Amortization

There are certain loan types that allow a borrower to ay less than the monthly interest owed. In this case, the difference is added to the princiapl balance owed. So, the amount you owe is actually growing over time. These loans can be very risky and are uncommon these days.

There are circumstances under which each of the amortization types are appropriate. The 30 year fixed loan remains the preferred choice for most homebuyers because it balances security, consistency and a low payment. This doesn’t make it right for you though. Each individual has different circumstances, goals and finances.

Contact me if you have questions about the various amortization types and to find out which one is the best fit for you.

Scott Storace

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