How Does a Repayment Mortgage Work?

Definition

A repayment mortgage is a fully amortized debt load that will expire on a predetermined date--so long as payments are made according to the signed contract. This is different from variable mortgages and negative amortization mortgages when the balance and interest can fluctuate periodically, thereby changing the expiration date on the debt. In the United States, these loans are often called "Conforming Mortgages."

Principal and Interest

A repayment mortgage is used to purchase a piece of real estate. Under normal conditions, the mortgage contains two parts to the monthly payment: principal and interest payments. The principal payment works to pay down the balance of the loan, while the interest portion is funneled back to the lender (or investor if the loan is sold) to reinvest in new loans. The amortization schedule begins with the borrower paying mostly interest and as the loan gets older, the percentage of principal paid in each payment increases until near the end of the term, when the vast majority of monthly payments work toward eliminating the balance of the mortgage.

Default.

Defaulting on a repayment mortgage puts the expiration date in jeopardy. Depending on the lender and the type of interest on the account, a borrower can accumulate additional interest on the loan--if it's simple interest, for example--by missing payments, paying late, or defaulting entirely. Also, by defaulting, a borrower runs the risk of losing the original terms of the mortgage agreement. If the lender determines that a borrower cannot pay, the loan may be restructured to avoid foreclosure, but in the process, the original rate and terms a borrower enjoyed may be lost.