Amortization is the repayment of a loan. It is usually used in conjunction with a time frame. For example, a 30 year loan term amortizes over a 30 year time frame.
The longer the term is for a loan the slower it amortizes. This slower amortization means a lower monthly payment. It can also mean more interest paid out over the life of the loan.
A typical loan payment involves two components:
part of it is the interest payment,
and part of it paying off the principal
A constant payment on a 30 year fixed loan term amortizes each month over a period of 360 months. This is normal amortization.
Amortization can also work in reverse. Minimum payment option loans, such as “1% loans” that you see advertised can give a borrower the option to pay less than an interest-only payment (the “minimum payment”). An interest-only payment keeps a loan the exact same size. It is not being paid off. Ever penny over the interest-only level is used to pay off the principal. If you pay less than the interest-only level, then you are actually adding to the size of the loan. An increase in loan size is known as “negative amortization”.
You will see 1% loans marketed under such names as:
minimum option ARMs
minimum payment loans
pick a payment loans
Lenders have been experimenting with longer and longer loan terms for mortgages. First 40 year loan terms were offered. Now some lenders are offering 50 year loans.
This article is from the http://www.archerpacific.com Loan Library. We have a large number of articles and quick tips to help you refinance, consolidate debt, shop for a mortgage, or anything else mortgage related.
Article Source: http://EzineArticles.com/?expert=Ben_Afzal