Mortgages: What is this “Amortization” thing?

Loan Amortization is nothing more than the process of paying off a loan through specifically structured periodic payments known as amortization. Amortized loans are different from other loans due to the way the amount and the structure of each payment is determined.

Amortized payments are calculated so that the whole amount of borrowed loan can be paid off by the end of amortization period. Amortization period for a mortgage loan can now be up to 35 years. An amortized payment includes both principal and interest, most often interest is guaranteed for a specific term equal to or shorter than the amortization period.

Some people confuse amortized loans with interest-only loans. Interest only loan is a type of loan which for a limited time only the interest is due, but not the principal. During this initial loan term the principal of the loan is not being repaid and remains the same. After the end of this period the borrower has several options. The first option is to repay the loan in full. The second option is to convert the loan int interest and principal paying loan and start repaying the principal of the loan too.

The interest only loans have lower monthly payments compared to interest & principal repayment loans, but the borrower needs to be able to repay the loan in full at the end of the interest only period or have the option to convert the loan into interest and principal repayment loan.

Thanks for reading!

About the Author

Amit Bhandari

In 1982 a couple had a child that was kept in hospital until he was given the all-clear to go home. As soon as it was given, these parents promptly escaped from a maximum security hospital to the Nottingham (England) underground. Today, Amit is wanted for his expertise in real estate within top school boundaries. Suffering through a recession 2008, Amit survives as a Realtor of fortune. If you have a problem, and if no one else can help, maybe you can hire Amit Bhandari.