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:
• 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.
• 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.
• 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:
• Linking risk
• Rising consumer price index
• Rising prime risk
• Exchange rate
• 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 .
Loan Amortization FAQ:
Question: What do you think about negative amortization loans. Are they good or bad?
I have had a negative amoritation loan on my house now for a year. I owe about 6,000 dollars more on my loan, but I have been able to save a little more than 6,000 dollars. Should I keep doing this type of loan or should I get a fixed loan. What are the good and bads for this type of loan?
Answer: NEGAM loans are usually meant for older people who have no one to leave their homes to so they “sell” it back to the bank in the future.
I don’t know what your credit score is and that makes a big deal in your decision but I would recommend getting into a fixed rate because the market is crazy in the summer. If you are thinking that you would like to keep your payments reduced you might want to research a “1%” or option arm. This is a plan that is fixed for 4 years and allows you to pay 1% the 1st year, 2 the 2nd etc.. 4% the fourth but then it is recast and you will want to get into another program before then. My advice to you would be to get into a good fixed rate with a maximum 1 year prepayment penalty or zero prepay.. which is a penalty for you either refi or selling your house until after the pre-pay period.
The thing I am concerned about in your case is that if the value of your home decreases, and your loan amount continues to increase, you might end up owing more then what you can realistically get for your home on the open market if you ever decide to sell.
Question: Is negative amortization a good idea to refinance my house?
Here’s the scenario: I’ve been offered by my lender into a 1% neg amortization with a 50K cash out. I do have enough equity to apply for this loan. My monthly payment will be reduced into half compared to my current rate. But the downside of neg am is at the end of every year, they will add an additional $3500 to my principal with a 3 year pre-payment penalty, in which I thought it’s not that much. I was thinking to buy another investment property using this 50K cash out and get another negative amortization loan on this 2nd property and I can rent it out. I thought this will be a good offer since I can get a cash flow through this rental. The reason I’m refinancing because my current rate was a 1 year arm and it’s going to increase to 7.5% soon.
Answer: Don’t sacrifice your home unless you have someone else you plan to live with when times are hard. Rental properties cost money when they are vacant, when things break and when people have to be evicted. Think of it this way…..about 7 mos rent will have to pay the mortgage the other 5 mos collected will go towards vacancy and repairs.
Question: What does negative amortization mean? As in 30 year fixed, 10 year interest only loan?
Answer: Negative AM means that your minimum monthly payments do not even make the interest payment, so your loan balance will go up every month. It is a lower payment, but a TERRIBLE loan for the borrower. The rate is too high and it usually pays a large commission to the person selling it to you.
A 30 YR Fixed with a 10 YR interest only loan is COMPLETELY different than a Neg AM loan. Your monthly payment will be higher than neg am, but your loan balance will not go up (or down). At least get an interest only loan. If you can pay extra towards principal, then do it. Your payment will go up in year 11, IF you keep the loan that long. The interest rate stays the same, but you will start paying to the principal in year 11.
Question: Need an amortization chart for loan of $3000 with weekly payments of $25 at 9% APR?
Answer: Check bankrate for calculators. You can type in the loan amount, interest, and minimum payment. The charts give you an amortization.
You can also calculate how much you can pay to get the loan paid off in a certain of time. Or how long will it take for you to pay it off in full paying $25 a month.
Question: How do I construct a 3-year amortization table for a three year 10%, 10,000 loan?
Answer: $322.67 will be the monthly payments. I have a software program from OfficeReady that calculates the entire loan amortization in seconds using some form of Excel spreadsheet template. There may be a similar calculator online that will amortize.
Question: When was the present amortization formula instituted and who came up with it?
I am trying to discover why amortization is used to extort exorbitant amounts of money for mortgages, car loans and the like. I want to know how loans were before amortization and how to change the present system to make things more equitable for buyers.
Answer: Loans were never before amortization, except that if you didn’t pay them back you were either thrown into debtor’s prison, sometimes along with your family, you were tortured, sold into slavery, etc. Amortization is used because how else would you figure out how much you need to pay to pay someone back for what you borrowed? If you borrowed $100,000 from someone, you need to pay them back the $100,000 plus interest. If you don’t want to pay interest, then you won’t really find anyone willing to lend to you. Amortization makes it possible for you to pay the same amount each month, and increase how much of your payment is going to principal and decrease how much is going to interest. The more time you have to pay it off, the slower the increase to principal and decrease to interest will be. The less time you have to pay it off, the faster the increase to principal and decrease to interest will be, but the amount you pay each month will be higher.
Question: I’m pretty green when it comes to loans…I have a 3yr loan, negative amortization that matured early.?
Six months early. We were paying 1,400 a month and now we are to pay 3,600 until Dec. We cannot pay it. The penalty will be 17,000 if we decide to refinance. Any suggestions what to do. The mortgage company did a real good one on us,our interest rate started at 1% and now 8.77% 2 1/2 yrs later. I am not sure to try to pay the 3,600 until Dec. Or get the house refinianced.
Answer: Contact your current lender directly. Sometimes, they will waive the penalty if you are refinancing the loan with them.
Question: What action can I take against a Mortgage broker who misled and grossly misrepresented a loan to me?
The documents has been signed and the loan closed two weeks ago,and I just found out that I’ve been taken with a negative amortization loan and a 3 years pre-payment penalty that I had no idea that was in the terms of the loan.
Answer: Breach of Fiduciary Duty is one that you can sue for. There are plenty more. Consult an attorney.