What is a Fully Amortized Loan?
Filed under: Finances
Whether you are buying a home or considering a refinance, one thing that is important to understand is the different types of loans and how amortization works. Do you know what it means to have a fully amortized loan?
Loan Terms for Full Amortization
If you have a home loan that is fully amortized, then it means that every time a payment is made, you always pay down the principal balance. With most types of loans, the payment is usually applied to the interest costs first, then the remaining amount goes to the principal.
When the loan is front-loaded with interest costs, it means that you won’t pay much towards the actual loan in the first year. Most of the money that you are paying during this time is paying off the interest costs.
The longer you have been paying on the loan, the higher percentage of your payments is going to the principal of the loan. For example, if you’ve been paying your home loan for 10 years, then you are probably paying down about $12,000 annually in principal costs.
Why Fully Amortized Loans Have Replaced Other Types of Financing
Most lenders are using fully amortized loans now instead of outdated types of financing, which is why it isn’t as common to see interest-only loans or negative amortization loans. These loans were used in the past so that homeowners had the option to only pay interest costs (with nothing going towards the principal of the loan).
But when the 2008 mortgage meltdown happened, the Dodd-Frank Act was created to protect homeowners from these mortgage practices. Now, lenders are limited in how they can provide loans because the financing must always allow a homeowner to build equity in their property.
Benefits of Fully Amortized Loans
The benefits are undeniable: as a homeowner, you have more stability in your real estate investment when you are paying on an amortized loan. Over time, you build equity, which puts you in a better position when you are ready to sell in the future. Eventually, it’s possible to pay off the property if you continue making payments.
Personalized Real Estate Advice
If you are thinking about buying a home in Temecula, then I’m here to help you find the best solutions for your unique needs. Email, call, or text me anytime: (951) 473-0390 or [email protected]