If you’ve dealt with borrowing money, you have likely heard of an amortizing loan. An amortizing loan is one that is paid back in installments over time. Almost all loans – unless they are paid back in a single payment – are amortizing in one way or another. There are two main types of amortizing loans: fully amortizing and partially amortizing.
So what’s the difference between a fully and partially amortizing loan? Well, here’s the answer.
Fully Amortizing Loans
Fully amortizing loans are made in payment installments throughout the entire term of the loan. For example, a fully amortizing loan for 360 months – this would be a 30-year loan – will have 360 equal monthly payments. Each payment will apply some to principle and some to interest, with most of the early loan payments going primarily to interest. As the loan period moves along, more of the monthly payment goes to the principle of the loan, assuming no extra payments have been made over the term of the loan.
Partially Amortizing Loans
Partially amortizing loans are made in payment installments for the majority of the term of the loan. The difference here is that at either the beginning or the end of the loan, generally the end, a balloon payment must be made before the loan can be paid off. These payments are calculated using a longer loan term than there really is, which is why making monthly payments on the loan for the extent of the loan will not pay the entire balance.
A balloon payment mortgage is a type of partially amortizing loan, because it does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size.
A good loan amortization calculator like the one from Credit Karma will break down your monthly payment and loan balance over the term of a loan.
Funding Your Home Purchase
It’s in your best interest to be well educated prior to discussing your home purchase with a lender. Funding your home purchase is the first step in the home buying process, so understanding the fundamentals of financing will allow you to make wise choices and avoid mistakes.
For more home buying tips, check out our blog posts on home buying advice.