The Amortization Process Explained: What is a Fully Amortized Loan?
If you’re in the process of selling a real estate note, you’re going to want to have a firm understanding of payment amortization. Put simply, your loan’s amortization schedule will determine how long it takes for you to receive a full payoff. With that in mind, we’ve created a guide on the amortization process below. Keep reading to learn more.
What is loan amortization?
While there’s no singularly accepted amortized loan definition, this term usually refers to a type of loan that requires a monthly payment and follows an amortization schedule. Typically, with this type of loan, the loan payments are divided between the remaining principal and interest until such time as the loan is paid off in full at the end of the loan term or the amortization period ends.
Many types of loans are amortizing loans, however, the example most people are familiar with is a 30-year, fixed-rate mortgage. With this type of home loan, the homeowner’s monthly payment remains the same, but the portion of the payment that goes to the principal and interest varies according to the loan’s amortization schedule. In total, the homeowner is expected to make 360 monthly payments to pay off the loan.
What is a fully amortized loan and how does it differ from a partially amortized loan or a non amortized loan?
Now that you know how to define an amortized loan, it’s time to take a look at the different types of amortized loans that are available on the market today. In general, there are three types to keep in mind: the non amortized loan, the partially amortized loan and the fully amortized loan. We’ve gone into more detail about each type below for your benefit.
Fully amortized loan
Put simply, if you make every payment on a fully amortizing loan, the loan will be paid off in full at the end of the loan term. The 30-year, fixed-rate loan we described above is a good example of a fully amortized payment arrangement. However, it’s worth noting that adjustable-rate mortgages can be fully amortized as well.
Partially amortized loan
Meanwhile, with a partially amortized loan, only a portion of the loan amount is amortized. Then, after a certain period of time, the remainder of the loan becomes due as a balloon payment. Notably, these days, balloon payments are more commonly found in mortgage notes than in traditional home loans.
Non amortized loans
Finally, there are also non-amortized loans. These loans are often more commonly referred to as an interest-only loan. With this type of loan, the borrower will only pay interest on the loan until such time that the loan reaches maturity. At that point, the entire principal balance will become due.
How debt amortization works
Typically, loan amortization is based upon three individual components. They are as follows:
- Your scheduled payments: Your payments are typically listed individually, one for each month over the life of the loan.
- Your interest rate: a portion of each payment will go towards interest, which is calculated by multiplying your current principal balance by your monthly interest rate.
- Your principal balance: After the interest has been paid, the remainder of your monthly payment will go towards reducing your principal balance and paying back your debts.
In order to reach a firm understanding of how loan amortization works the best thing that you can do is look at an amortization schedule. If you have a typical mortgage on your home, you will likely have received the schedule with the rest of your loan documents. However, if you have an alternative financing scenario, you may have to ask the person handling your financing to provide one to you.