Today, I was reading up on different types of loans - specifically, a fully amortizing vs. partially amortizing loan. I encountered the following table illustration:
What I notice is that with amortizing period loan of 20yrs at 10yrs loan term vs a fully amortized loan, even though the partial amortizing loan monthly payment is 27% less, the total dollars paid out to it is only 19% more! I would have assumed that if I paid 27% less per month, then I would pay 27% more in the end. However, what this table is showing is that I can pay 27% less each month and only have to pay 19% more in the end, saving me a difference of at least 8%. This isn't even taking into account the higher interest deductions. So am I interpreting this table correctly - that I should always try to go for a longer amortizing period assuming the same loan term? Is there something I'm not catching?
Updated about 9 years ago
I want to rephrase my questions because I wasn't sure if they were clear... 1) The table illustration seems to suggest that it's more beneficial to obtain a partially amortized loan. The greater the amortization period is over the loan term, the more adv
I tried updating my original post but it cut off my update so I will just post it here...
I want to rephrase my questions because I wasn't sure if they were clear...
1) The table illustration seems to suggest that it's more beneficial to obtain a partially amortized loan. The greater the amortization period is over the loan term, the more advantageous it is for the borrower vs. a fully amortized loan. Am I correct here?
2. What are the risks associated with a partially amortized loan? I can think of one obvious off the top of my head... potentially not being able to refinance by the end of the loan term. What other risks are there?
Hi, there are several aspects of modifying the amortization period. Saying a partial amortized loan can mean several things, but the most common is limiting the effective term by additional payments to principal or in the timing of the application of payments to principal. In this example, without putting a calculator to it, it appears to me to be a ballon payment at the end of ten years with a 20 year fully amortized monthly payment.
Taking a long fully amortized loan with a balloon payment allows smaller payments being applied to principal which is reduced at a slower rate. If that is the case and since interest accrues on the outstanding principal amount each period, interest expense will be significantly higher.
The disadvantages of doing this are that the baance is required to be paid at the maturity or at the balloon date.
The likleyhood of obtaining financing in the future rests on the same factors as a new loan today. Credit, capacity, collateral as well as the unknow interest rate risks.
WIll your credit suffice in the future?
Will you have the capacity to make the payments?
Will market values effect the collateral value to meet current lending requirements?
Will interest rates be higher in the future?
I usually advised those wanting a 15 yr fixed rate loan to take the 30 yr fixed rate and make the 15yr payment requirement, if there were not significant interest rate differences. This would provide several advantages. The contractual obligation is less so qualification for other financing is not as limited. In the event of a financial emergency, you're not obligated to make the higher payment. Bill
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