Amortized Loans

What are they and how do they work?

When financing to buy real estate there are many forms of loans you can receive. Different plans can gain and loose favor with different lenders and borrowers as the markets tend to go up and down. These loans are known in the real estate world as mortgages. A mortgage is a conditional transfer or pledge of real estate as security for the payment of a debt.

The one loan I will talk about today is a Fully Amortized Loan. This type of loan will partially pay off both principal and interest at the same time. Amortized loans are the type of loans most lenders will use for mortgages. Generally they are payed off over a 15 or 30 year period, and then at the end of this period the final principal and interest should equal zero.

For example: A mortgagor (Borrower) receives $100,000 from the mortgagee (Lender) and agrees to pay an interest rate of 5.0% per year for 30 years, making the monthly payment $536.82. With this information you are able to calculate the interest and principal made on each payment like shown below:

$100,000 Balance x 0.05 Interest = $5,000 Annual Interest

$5,000 Annual Interest / 12 Months = $416.67 Monthly Interest

$536.82 Monthly Payment - $416.67 Monthly Interest = $120.15 Monthly Principal

$100,000 Balance – $120.15 Monthly Principal = $99,879.85 New Balance

Then this process will be made for each of the 360 payments using the new balance.

Where a mortgagor can benefit from this type of loan is being able to budget for the set monthly payment and if the borrower pays more this surplus will be added to the principal, paying off the loan quicker, with less interest.

As this process can be difficult to do on your own there are many amortized loan calculators on the internet to help you out like this one: https://www.amortization-calc.com/