Water Zap Business News

Monday, June 26, 2017

Loan Amortization


Loan amortization is the periodic reduction of the principal balance of a home mortgage that is usually fixed in rate by preference of the borrower. Such payment schedules give assurance to the borrower that the payment will not increase during the term. Prior to the 1970′s, the fixed interest rate, constant level payment plan dominated mortgage lending. Repayment schedules began to change when the economy became unsettled with high inflation and interest rates, encouraging alternative methods of repayment. When the economy is stable, fixed rate loans and loan amortizations become popular. It is not only wise to look at the market, but to look to God for direction. “In all thy ways acknowledge him, and he shall direct thy paths” (Proverbs 3:6).
Lending preferences change as interest rates rise. Alternative repayment plans are sometimes more useful in helping a borrower qualify for a larger loan than fixed rates may allow or keep interest rates and payment amounts low for a short term. Alternative plans make housing sales happen that otherwise wouldn’t. Repayment plans that are alternative to loan amortizations are as follows: 1) adjustable rate mortgages, 2) graduated payment mortgages that allow lower early monthly payments and, 3) mortgages that can reduce total interest cost. A loan amortization involves constant payments for the term.

Each payment is calculated so that all interest due to payment date is included, plus a portion of the principal. The periodic reduction of the balance is loan amortization. By the 1970′s, it became obvious that more flexible repayment plans were needed to meet changing market requirements. The fixed rate schedules have remained popular, holding well over half the new origination market. This is true even though these loan amortizations are normally offered at interest rates about 2 percentage points higher that ARM or adjustable rate mortgage loans.

There are several reasons for the continuing popularity of this type of lending. In periods of low interest rates, borrowers are reluctant to commit to an ARM that might start to increase in cost. In this sense, fixed rate offers protection. The growing use of mortgage pools to raise lendable funds in the financial markets tends to encourage fixed rate schedules. If a borrower is concerned about interest rate and is interested in receiving a fixed rate loan amortization, they should be sure that they have a high FICO score, as interest rates are directly determined by credit report scores.