Home Loan Amortization For Periodic Payments
Amortization is the process of clearing out your home loan by making periodic payments. Amortized loans are different from other loans due to the way the amount and the structure of each payment is determined. The word “Amortization” or amortisation comes from Middle English “amortisen”. This term means to deaden or kill, as in to “kill off” or eliminate the loan a bit at a time, via regular payments. An amortized loan is one which has regular periodic payments – usually monthly but can be weekly, bi-weekly, quarterly, etc. which include amounts for both principal and interest. Most consumer loans today are amortized loans.
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Difference between amortization and depreciation
Amortization usually refers to spreading an intangible asset’s cost over that asset’s useful life. Depreciation, on the other hand, refers to prorating a tangible asset’s cost over that asset’s life. For example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment is spread out over the life of the patent, with each portion being recorded as an expense on the company’s income statement. Amortization is generally used in the context of writing off loans or intangible assets in equated annual/monthly installments over a scheduled period.
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Depreciation refers to prorating a tangible asset’s cost over that asset’s life. For example, an office building can be used for a number of years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year. Depreciation is writing off tangible assets as consumed on pro-rata basis, for estimated pre-defined life of the asset.
Negative Amortization
In finance, negative amortization occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases. Unlike most other adjustable-rate loans, many negative-amortization loans have been advertised with either teaser or artificial, introductory interest rates or with the minimum loan payment expressed as a percentage of the loan amount. For example, a negative-amortization loan is often advertised as featuring “1% interest”, or by prominently displaying a 1% number without explaining the FIR.
The Fully Indexed Rate (FIR) is the sum of the Margin and the current Index value at the time of adjustment. Negative amortization arises when the payment made by the borrower is less than the interest due and the difference is added to the loan balance. If for some reason a borrower only makes a partial EMI repayment, say of half the interest due that month, the shortfall in the interest payment is added to the loan balance.
Loan Amortization Schedule
Amortization schedule is a schedule of payments for completely repaying a loan. It is a table that breaks down each payment (EMI) into interest and principal components. It also depicts the outstanding principal as of each repayment date. An “amortization schedule” for your loan will display the amount of your loan’s principal, the amount of your monthly payment, the interest which would be taken in periodically, how much will be applied to trim the principal, how many regular payments you have to make in order to pay off your mortgage loan.
Some banks have “balloon” home loans. In this type of loan, the necessary periodic payment is set on an amortization schedule that continues beyond the due date of the loan. The main problem with the balloon type loan is the inability of most people to come up with the money needed to pay off the loan at the end of the term. Banks are allowed to exercise a mixture of various methods to compute the interest due on mortgage.
Understanding amortization can result in simple strategies to pay off your loan faster as well understanding what to avoid for preventing having the term of your loan (and your payments) extended. Gratefully, there are numerous free loan amortization table calculators accessible on the Internet. You could use them to compute your periodic payment prior to deciding which loan is best for your situation.
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