The Benefits of a Partially Amortized Loan

Article Posted by Expert Author: Sam Stieler  on 09/23/2013

Are you aware there are multiple types of mortgages you can acquire, each with its own specific terms? It’s true, though most people only need to make one big decision when choosing the structure of their loan- whether they want a partially or fully amortized loan.

What is a Fully Amortized Loan?

The fully amortized loan is one whose payments are made in installments for the entire term of the loan. What this means is that a loan that is 60 months in length will be paid with 60 monthly payments that are equal, with each payment going partially to interest and partially to the loan's principle. In a fully-amortized loan, most of the initial payments go toward interest primarily.  However, as time passes, more of each monthly payment is directed toward the loan's principle.

The benefits of the fully amortized loan are that it can help homeowners who don't have a lot of money to make a significant down payment on their home. As well, this loan type can help homeowners to pay down their principals more quickly. A fully amortized loan also offers financial stability, as the homeowner pays the same amount each month until the loan's end.  And when loan's end is reached, the buyer doesn't owe any more money on their home.

The fully amortized loan does have some risks. First, if a homeowner ends up selling their home within two or three years of getting the loan, the higher payments and interest rates may be wasted money. If the need is there for flexibility with cash, the fully amortized option may not be right for you.

What is a Partially Amortized Loan?

A fully amortized loan is the sort of mortgage you’re accustomed to hearing about, which is a loan where you pay it off with nothing more than a monthly series of roughly equivalent payments that stretch out of the life of your loan. However, the partially amortized loan will include what is called a 'balloon payment' either at the beginning or at the end of the loan. This balloon payment is a single large lump sum you are responsible for at either the beginning or the end of your terms. The balloon payment must be made in order to consider the loan paid, and this usually occurs at loan's end. Which structure you choose depends a lot on how well the benefits of each match your needs.

The good news about the partially amortized loan is that it will typically mean a lower interest rate, as well as lower monthly payments for the buyer. As well, this option is great for the buyer who is able to make a significant down payment on the home they want to buy. Partial amortization can also be an option when the buyer plans to sell their home prior to the loan 'ballooning'. It can also benefit the buyer who may be low on income, but who is sure their financial situation will improve at the end of the loan when the balloon payment will be due.

There are pitfalls to avoid with partial amortization. Although the low initial payments may be very tempting, the buyer should do their best to ensure that they will be able to afford the balloon payment required with this option. Otherwise, an unfortunate situation could be the result, such as foreclosure.

Make sure you refer to our home mortgage calculator to understand the real costs involved in a variety of loans so that you can select the best scenario for your particular situation.  You can also check out the industry jargon so that you speak the same language as the representatives from your lending institution.

 


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