Credit Loan > Loan Calculator > Amortization and Your Loan

Loan Calculators: Funny Old Word, Amortize

There are many types of loans available when you decide to take out a loan. Loan calculators can not only help you determine what your most likely interest rate should be and what you can afford to borrow, but it may help you decide the repayment type that is best for you.

Loans can be repaid quickly or over a longer period. The repayment period is generally contingent on the size of the loan. Car loans, for example, tend to range anywhere from two to six years, whereas home loans with 30-year periods are not atypical. Any loan can be paid off early, though there are sometimes penalties for extremely early repayment. This too is dependant upon what type of loan, lender and agreement you have. Home loans come in three main forms.

Adjustable rate, interest only and amortized. An adjustable rate loan is just what it sounds like. The interest rate on the principle will vary with the market at certain agreed-upon intervals. As a rule this means that at some point during the life of the loan, the rate is very likely to go up and possibly quite a lot. That doesn’t make it completely untenable, but it is something that must be gone into with very careful thought.

The same is true for an interest-only loan. In this type, the borrower is paying off only the interest, not the principle for a significant part of the life of the loan. This is risky because at some point there will be a large chunk of the principle required (crippling balloon payment) that can cause homebuyer distress. It may also be more difficult to build equity with this type of loan.

An amortized loan, by contrast, is one where the principal of the loan is paid down over its entire lifetime, using an amortization schedule. This is generally done with equal payments. Every payment to the lender consists of a portion of interest and a portion of principal.

This loan type also has a fixed interest rate, meaning that while there are a few outside factors such as insurance and property taxes, which can affect the monthly payments, they are not subject to market fluctuations or balloon payments.

If you bought your house planning to sell it in a few years and then the market tanked, an adjustable rate mortgage could lead to a sudden increase in repayment amounts beyond the point you had originally planned to own the home. With a fixed rate, amortized loan, your payments will remain effectively the same and you will be paying down the principle as well as the interest.