Loan Amortization Explained

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[00:00:40] Full Amortization - Full Principal & Interest Payments - Loan Paid Down to Zero
[00:01:13] Partial Amortization - Partial Principal & Full Interest Payments - Balloon Payment
[00:01:44] No Amortization - Interest Only Payments - No Principal Paid
[00:02:07] Negative Amortization - No Principal Payments & Partial Interest Payments - Capitalized Interest
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Amortization is the term for paying down the cost of an asset at a certain rate. In the real estate world, typically when we're referring to amortization we are referring to the rate at which we are repaying the principal on a loan back to the lender. Let's take a look at this graphically.
Full Amortization - Full Principal & Interest Payments - Loan Paid Down to Zero
Imagine that we have our loan amount and time, let's say this is 30 years. If a loan is fully amortizing, it is paid off down to zero at the end of the life of the loan. It starts out at whatever the loan amount is and a fully amortizing loan is paid completely off. The most common example of a fully amortizing loan would be your standard 30-year fixed-rate home loan. You have an equal payment that goes every month for the entire life of the loan and at the very last payment, the loan balance is zero.
Partial Amortization - Partial Principal & Full Interest Payments - Balloon Payment
Sometimes we have what's called a partially amortizing loan and that would be when the loan is paid down but not all the way. In the case of a partially amortizing loan, we end up with a balloon payment. Typically when you find a partially amortizing loan it is often because payments are amortized over say 25 or 30 years, but the term of the loan is shorter and we have a balloon payment say after maybe 10 or 15 years.
No Amortization - Interest Only Payments - No Principal Paid
The next type of structure is no amortization. In other words, not paying any principal at all, we're simply paying interest only. The loan balance at the beginning of the loan never changes, it stays constant throughout the life of the loan because payments are only made to cover interest and not pay down any principal.
Negative Amortization - No Principal Payments & Partial Interest Payments - Capitalized Interest
Finally, sometimes we run into what we call negative amortization. Typically negative amortization occurs when payments are not sufficient to cover even the interest that has accrued each month or each period and any unpaid interest is capitalized onto the balance, thereby increasing the loan amount and the loan balance over time.
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28 сен 2024

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Комментарии : 33

@RealEstateFinanceAcademy 4 года назад

What lessons or concepts would you like me to teach you? Tell me below! - Trevor

@jeahhh 2 года назад

Can you go over loan pricing for commerical loans? what actual vs 360 means etc, how commerical loans operate etc usually they renew every 5-7 years etc

@Oryung18 2 года назад

wow honestly i watched so much video but .. you explained simple and made me understand about amortization , partially amortization , interest only and Negative Amortization in 3 min... Thank you so much!

@RealEstateFinanceAcademy 2 года назад

My pleasure! Happy to help! Thanks for the feedback. - Trevor

@rolandojakolan9042 Год назад

how do you write backwards tho?

@1spore2 7 месяцев назад

He probably just mirrors the video while editing

@thefixedoneout1662 4 месяца назад

I was wondering the same thing

@deehanhaque9278 2 года назад

Useful video 👍

@lilyajmurko8332 Год назад

Thank you so much

@RealEstateFinanceAcademy Год назад

You're most welcome! Happy to help! - Trevor

@LukasNachtigall 2 года назад

Awesome explanation! :)

@RealEstateFinanceAcademy 2 года назад

Thank you, Lukas. Glad you liked it! - Trevor

@LukasNachtigall 2 года назад

@@RealEstateFinanceAcademy There is one thing, that I do not understand. Why the loan has a 30years amortization, while the loan term is 5 years only? Is that just because the buyer has lower payments and pays more at the end as a balloon payment? And when it will be 5yrs amortization and 5yrs loan terms, it's going to be a much higher monthly payment and no balloon payment at the end. Am I correct? I'm working on an offer for a business with seller financing terms (I want to buy a business), so I'd like to be able to present that offer. And the main advantage for the seller is taxes to be paid monthly and get 4% p.a. right? Thank you for your time :)

@RealEstateFinanceAcademy 2 года назад

@@LukasNachtigall Hi Lukas. Yes, you are correct. Loans with a term shorter than the amortization that end with a balloon payment are quite common. The amortization only changes how much principal is paid each month. The amount of interest is not affected. So, for example, if no principal is paid (aka interest-only) then the interest payments would be the same every month and the balloon payment would be equal to the original loan amount. If you are working on proposing seller-financing, then you should consider asking for interest-only terms until you are able to increase the value of the property and refinance. Interest-only terms may benefit the seller as well, since they may have to pay capital gains taxes on any principal they collect from you. So it could be a win-win for both of you. (I'm not an accountant, so this is not tax advice. Be sure to talk with a CPA prior to making an offer.) Hope this helps! - Trevor

@DrFinancialLiteracy 6 месяцев назад

Awesome video

@RealEstateFinanceAcademy 4 месяца назад

Thank you! 😊 - Trevor

@OrlandoJurado 9 месяцев назад

Can you do a loan with 36 months and 24.31% 157 monthly payment

@RealEstateFinanceAcademy 9 месяцев назад

I don’t understand your question. Can you elaborate? - Trevor

@longjiang2005 3 года назад

透明黑板好评

@RealEstateFinanceAcademy 2 года назад

谢谢！;-) Trevor

@mhaas281 5 месяцев назад

So the best thing to do is make some large principle payments and kick the amortization down the road and pay off your 30 years in under 10. Don't let the Banks rob you.

@XcaliburReborn Год назад

Jesus I’ve just discovered your videos and this is best visualization and explanation I’ve seen on the internet

@RealEstateFinanceAcademy Год назад

Thank you for the nice comment! Much appreciated! I’m glad you found it helpful. - Trevor

@ret4kind 11 месяцев назад

Is there a product that front ends principal payments at the start and interest at the end?

@RealEstateFinanceAcademy 11 месяцев назад

Good question. No, interest is paid always first.

@curiousengineer6436 4 месяца назад

very helpful. . thanks man 👍🏻

@rustyshackelford8140 Год назад

Is there amortization where you can pay extra(when you can) and have the monthly go down a certain way to where by the time "x" gets to 30, "y" will be 0 and the monthly payment won't lessen past ±33% of where it started at day 1. This seems like it'd be better for everyone involved. If not, why?