Understanding Loan Amoritization

When Amortization applies, part of every payment goes directly toward the interest due for a determined period. The remainder is used to reduce the principal or loan balance. There are also Negative Amortization Loans known under different names such as "COFI ARM", "Option ARM", and the popular "Deferred Interest ARM", but there are many others. Adjustable Rate Mortgage loans are typically tied to the COFI or MTA index. These amortizations loans are usually advertised as loans with very low interest rate, in fact currently as low as 1%. However, promoters never say that 1% is not the true interest rate to be charged on the loan but the percentage rate to be used calculating your minimum required payment for the first year. This way the current interests rate charged to the loan is equal to the index in addition it adjusts each month after the second month, according to the changes of current interest rates. In standard Amortization Loans, the balance is gradually reduced as a progressively larger portion of every payment is going to reduce your principal. A good example is the 15 and 30-year fixed-rate mortgages, the most common Amortization Loan in the United States. Paying off a $100,000, fixed-rate mortgage signed at 15 years, with an interest rate of 7%, returns a total of $898.83 that the borrower must pay monthly for the next 180 months. Making just a small adjustment to accounting with the first payment of $583.33 going to the interest of $315.50, this is used to reduce the principal. On the other hand, Negative Amortization Loans requires a minimum payment, Interest Only Payment is paid without getting to the principal, and your principal balance that is outstanding usually remains unchanged. With Negative Amortization Loans, you have principal and interest due, besides the extra amount of money to fully-amortize the loan over a 30-year period. Whichever type of Amortization Loan, there is a table composed of a row per each payment period of an Amortization Loan, showing the amount of payment needed to pay, the amount that is used to reduce principal, interests and the remaining balance of the loan at the end of each period. Consider as an example, a Negative Amortization loan increasing to 110% of its original terms, and making this a full Amortizing Loan, under the arrangements of the 30 year term, the borrower lost the periodic payment options and must pay shortly the fully-amortizing payment. Because Negative Amortization Loan does not reduce the balance, and people are not paying back the principal, this type of loan is the most popular Amortization Loan and the only one where your loan balance increases over time while lowering your monthly payments. Negative Amortizations loans are also the favorite of speculators that may use them when home prices will increase rapidly, according to their housing market perception, being a great idea in theory, but risky as any other speculating activity in real estate. Financial directory