Help Me Understand Loan Amortization

January 21st, 2011 admin


The term ‘amortization’ shares its origin with the word ‘mortgage.’ Both come from the Latin root, ‘mort’ which means to terminate or kill. It should be every person’s goal to terminate or kill the balance on his or her home loan (mortgage); in order to accomplish this, a portion of each payment must go towards paying down the principal. Because the lenders charge interest, a portion of each payment also must go to them. In this article, I hope to help you better understand loan amortization.

Basically, loan payments are calculated by dividing the principal balance by the number of payments. Interest charges must also be added in to each payment, and therefore only a portion of each payment will apply to the principal. Each month the balance on the loan will decrease slightly. Because interest charges are a percentage of the balance, they also decrease each month. The payment amount remains constant, so it only makes sense that as more payments are made, a larger portion of each payment will apply to the principal. Amortization is this process of determining the payment so that a portion of each payment applies to the principal and a portion to interest charges.

There are a few types of loan programs that each amortizes a bit differently. There are adjustable rate mortgages (ARMs), fixed rate mortgages (FRMs), interest only loans (IO), and negatively amortizing loans to name a few.

An ARM is a loan with an interest rate that is fixed for a certain period of time, after which it becomes adjustable. Commonly, ARMs will have a period of 2, 3, 5, 7, or 10 years for which the interest rate and payment are fixed. When the “fixed period” is over, the interest rate may adjust up or down; consequently the loan will re-amortize causing the payment to also adjust up or down. For more information on ARMs, search this directory or visit the website below for my article entitled, “What’s best for me – an ARM or Fixed?”

A FRM will amortize at the beginning of the loan and remain constant throughout the life of the loan. The interest rate on a FRM never changes (hence the name), nor does the payment.

Interest only loans operate just as they sound. These payments are not technically amortized, rather 100% of all payments will apply to paying off the interest charges before any principal is paid down. IO loans can be helpful in some instances, but can be problematic in others. You should consult with an honest and ethical mortgage professional to determine if an IO loan is right for you.

Negatively amortizing loans (such as the MTA Option ARM) are dangerous loans that can be quite confusing to the common consumer. These loans, namely the Option ARM, typically carry payment options. One option is to pay a fully amortized amount; this means that each payment will cover a portion of the principal and the interest charges. The second payment option is an interest only option. And the third payment option is a very small amount (allowing consumers to feel as though they can afford a house that they really cannot) that does not cover all of the interest charges. The amount of interest that is not covered by this payment is simply added back onto the loan balance (negative amortization). As a borrower pays with this option, they will see themselves going backwards in their loan. For more information on the Option ARM, search this directory or visit the website below for my article entitled, “I’ve been paying on my mortgage and my balance went up!?”

By: Drew Tyler

About the Author:
–
Drew Tyler is an experienced and successful mortgage professional. To gain more insight into the mortgage industry, and make yourself a more educated borrower, please visit www.competingloans.net.



Loan Calculators Online

January 21st, 2011 admin


A loan calculator is an essential tool for any borrower, and many lenders offer one on their website. When you want to apply for a loan from a lending institution, it is imperative that you should be aware of the amount of interest you will be required to pay in order to make a more informed decision on the amount of loan for which you wish to apply.

A loan calculator is an automatic tool that you can use to know the amount of interest you will be charged for a certain amount of money and the period of time you will be paying. Using this calculator, you can manipulate it to know the total interest you will pay, the monthly payments, the interest as a percentage of principal, interest paid in regard to whether it is simple or compounding interest, and other functions.

Just like many online car loan calculators, the loan calculator is automatic and will give you your answers instantly depending on what you want. It has a simple user interface where you simply fill in whatever variable you are using and the calculator will give an answer to what you want, whether it is the interest rate, principal or the amount payable over a certain period of time. The calculator works out an estimate of the amount of your monthly loans payments and the total annual income that is required in order to be able to repay the loan in monthly installments without a lot of financial strains.

Loan calculators can be used to compute government and private student loans, mortgage payments and car loan payments. In computing your loan variables (interest rate, principal and amount of time over which the loan has to be paid); the loan calculator assumes that the interest rate will remain constant during the repayment period. The calculator may have a fixed interest rate, usually between 5% to 8.5%.

The next assumption made by the calculator is that the loan will be repaid in monthly installments that are equal through standard loan amortization (that is, standard and extended loan repayment). Due to its assumption of fixed interest rate standard loan amortization, the calculator may not display accurate results if you are calculating alternate repayments plans such as income contingent repayment and graduated repayments.

You can find loan calculators readily available for free on the internet. There are basic and advanced types from which you can choose, though not all sites offer each. The basic calculators allow you to enter the number of payments you want to make, or the number of months over which you want the loan to extend, and the calculator works out the monthly amount you will be required to pay. With these, you are able to try various combination of affordable payments over the payment period. Advanced loan calculators enable you to figure out your debt-income ratios in additional to offering you results for different payment scenarios.

One of the advantages of using a loan calculator is that you can figure out the amount that you can borrow, you can find out how much of a deposit, or down payment, you have to make to maintain affordable payments, you can calculate your savings on tax and you can make informed decisions on whether to go for fixed or adjustable mortgage rates.

You can use the loan calculator to decide if you should consolidate your debt with a second mortgage or a home equity loan. You can also know the amount of time you will take to break even on the closing costs. Other calculations you can do include determining the impacts of early payments on your loan and capital gains (if you wish to calculate investment and tax plans).

By: Richard Jefferies

About the Author:
About the Author. For instant loan calculators use our finance calculators visit Finance Ezi website. Finance Ezi is an Australian finance broker for asset finance.



Basics of Loan Amortization Tables

January 20th, 2011 admin


One of the most important and costly investments people make in their life times is the purchase of a home. The decision to take out a home mortgage is a huge one; and it’s extremely important that people figure out which type of mortgage is the best type for their unique situation, and make sure they have calculated the amount of mortgage they can actually afford. It’s necessary also, to fully understand the rate of interest that you are paying and how it is calculated, as it will affect the amount of money you are borrowing immensely. There are a number of ways that interest rates are calculated, but most banks calculate the interest according to what is known as a loan amortization table.

Amortization is a fancy word that basically describes the number of years it will take to repay the loan completely, with interest.

There are three types of loan amortization tables that are used most frequently, including:

o Equal Capital – In this type of amortization table, the calculation system will display each of the equal monthly payments as well as the total variable payment that is made to the bank. The amount of the repayments decrease as the term of the loan gets closer to the expiration date.

o Spitzer Amortization Table – In this type of amortization table, the repayments are often considered the most optimal. A Spitzer loan provides a fixed monthly payment, even with a variable rate of interest that may adjust throughout the repayment period. Unfortunately, however, many people mistakenly believe that most of the interest is paid within the first year of making repayments on this loan, but that is not the case.

o Bolit Amortization Table – In this type of amortization table, the payments that are made pay the interest on the loan, and the principal amount of the loan is only paid after a specified period of time. So the beginning payments are interest only.

As with any investment tool, there are numerous risks associated with loan amortization tables, including:

o Linking risk

o Rising consumer price index

o Rising prime risk

o Exchange rate

o Fluctuating interest rate risk

If you are able to define the type of risk involved with the various amortization tables, then you can have a better understanding of how to best neutralize the risk.

By: Bart Rutherford

About the Author:
Make sure to use good loan amortization tables to help you with loans and mortgages calculations. Also More great tips at http://www.amortizationfast.com.



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