Explanation of Repayment of a Mortgage
Mortgage lending has become more and more diversified as it makes inroads into different markets around the globe. Instead of simple 30-year repayment mortgages, loan brokers, investment banks, local banks and even Congress have encouraged the notion of higher earnings and higher homeownership. Thus, with so many different products from which to choose, it's important to be well-versed in mortgage repayment.
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Conventional Repayment
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A fixed-rate, fixed-interest mortgage has a standard amortization schedule. The idea of the amortization schedule is to ensure that each payment made on such a mortgage is equal and consistent. For example, a $200,000 mortgage at a 6 percent interest rate, and on a 30-year term, will have a monthly payment of $1199.10, according to Bankrate.com. The amortization schedule will show interest and principal payments for each month and year paid. As you pay down the loan, the interest payments each month begin to decrease, and the principal payments begin to increase. Thus, in the latter years of a mortgage loan, a payment will be mostly going to pay down the principal of the loan.
Schedule
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Repayment on conventional loans follows a payment schedule. For example, if your loan is due on May 1, the interest you are paying on the loan was accrued between March 15 and April 15. Each payment period charges 1/12th of the interest, for example, using the example in the previous section, 1/12 * .06 = .005. Then, this figure is multiplied by the loan amount, or, $200,000 = $1,000.
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Interest-Only Loans
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Interest-only loans are mortgages that require the borrower to pay only the interest due on the loan for a specified period of time. Most times, the interest-only period on these loans ranges between two and 10 years. In most cases, the amortization schedule for a conventional loan begins as soon as the interest-only period expires. Therefore, a customer would pay more interest in total.
Negative Amortization Loans
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With negative amortization loans, instead of paying down the principal balance on a mortgage, customers who opt to pay the negative amortization payment--which isn't enough to cover even the interest accrued--will actually see their principal balance increase as the unpaid interest is added to the total amount outstanding. These loans normally have balloon clauses that require the borrower to pay the entire balance after a period of years.
Extra Payments
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Customers can reamortize their mortgages by making extra payments. If a borrower has a standard fixed-rate, fixed-interest mortgage and makes additional payments on top of the standard payment, she puts that extra money directly toward reducing the principal balance. Thus, the amortization schedule recalculates to adjust for the new principal balance resulting in less interest payments in the future.
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