Fully Amortizing Payment
Candlefocus EditorFor any loan, the fully amortizing payment amount is determined by four factors; the loan amount or principal, the interest rate, the length of the loan (term of loan) and payment frequency. The payment frequency is usually monthly, but can also be semi-annual or annual. The factors are used in a mathematical formula, in which the payment is calculated as a combination of principal and interest. Generally, the payment consists of a larger portion of interest, which gradually reduces over time as the loan principal is paid down.
For a fixed-rate long-term mortgage, the fully amortizing payment is set up with predefined payment amounts over the life of the loan. The borrower may be able to increase this payment at any time to reduce the loan length and the total cost of the loan. Alternatively, if a borrower experiences financial difficulty, they can request to reduce their payment, or to extend the loan term, as long as certain criteria are met. For example, if payments are delinquent, in most cases fees or penalties may apply.
While other types of mortgage loans, such as interest-only payments, exist, fully amortizing payments are the most common and popular form of loan repayment. This type of loan offers predictable, stable payments and is best for borrowers who plan to stay in their home long-term and who prefer predictability over potential savings.
Fully amortizing payments protect the borrower from unexpected increases to the loan’s total cost. They also protect the lender from the risk of default, as the loan quota is paid in predetermined amounts, with interest and principal included. This way, an amortizing loan is an ideal choice for both lenders and borrowers when a large amount of money is being borrowed for a long period of time.