What is a Fully Amortized Loan?

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When you are preparing to buy or refinance a home, it is important that you learn more about the different types of loans that are offered. You might be familiar with the term “fully amortized,” but do you know what it actually means?

Fully Amortized Loans

If a loan is fully amortized, then the loan terms will require that you pay down the principle balance each time a payment is made. When you pay most types of loans, the payment is applied first to the interest costs that were accrued, then the rest of the amount is paid to the principle of the loan.

This type of loan is front-loaded with interest, which means the first year you might only pay a few thousand dollars on the loan. The rest of the money went to pay off the interest costs of the financing.

As you progress with the loan, a higher amount of your monthly payment goes towards the principal of the loan. For example, by the 10th year of the loan, you are likely paying about $12,000 in principal costs each year.

New Financing Practices

The fully amortized loans have pretty much replaced old types of financing, such as negative amortization loans or interest only loans. These types of loans were used in the past, allowing homeowners only to pay the interest costs without paying anything towards the principal of the loan.

The mortgage meltdown crisis that happened in 2008 brought about the Dodd-Frank Act, which put rules into place to protect homeowners. This Act controls how the lenders offer the loans, to be sure that homeowners are building equity in their property.

Benefits of Fully Amortized Loans

The benefit of a fully amortized loan is that it offers stability to homeowners. You will be able to build equity in the home so that you can maximize the amount of money that is available when you decide to sell.  The long-term goal of this type of loan is to help you eventually pay off the house.

When you are ready to make a real estate purchase in the Temecula real estate market, contact me for more information. You are invited to send me an email or a text anytime: (951) 473-0390 or [email protected]