What’s the Difference Between a Fully and Partially Amortizing Loan?
Are you ready to buy a new home? If so, it’s important to decide how to finance your home purchase.
One aspect of financing that’s important to understand is the difference between a fully and partially amortizing loan. Almost every loan fits into one of these two categories.
Both options have their advantages and disadvantages, so it’s important to learn the differences and decide which type of loan meets your needs.
Let’s take a look at the difference between fully and partially amortizing loans.
Fully Amortizing Loan
Fully amortizing loans are an extremely common type of loan that you’re probably familiar with — even if you don’t recognize the term.
These loans are paid off through equal monthly payments over a certain period of time. So, if you were to take out a 15-year loan, you would repay it via 180 equal monthly payments. Each payment would apply to both the interest and principal of the loan.
By the end of this repayment term, you will have repaid your loan in full.
Partially Amortizing Loan
Partially amortizing loans work a little bit differently.
Like fully amortizing loans, partially amortizing loans require you to make monthly payments of the course of your loan term. However, these payments will not cover the entire balance of your loan.
Instead, partially amortizing loans require you to make monthly payments based on a longer loan term that your actual term, so the monthly payments are smaller than they would be with a fully amortizing loan. With these types of loans, you have to make a balloon (lump sum) payment at the beginning or end of your loan term to cover the remaining balance.
Balloon payment mortgages fall into this category. With these mortgages, you have to make a lump sum payment at the end of your loan term to completely pay off your loan.
Pros & Cons
The main benefit of partially amortizing loans is that they give you a little bit of additional cash flow over your loan term. Lower monthly payments mean you have more money available to cover other expenses, like home improvements.
On the other hand, the biggest downside is the lump sum payment you have to make at the end of your mortgage term. These balloon payments are typically very large and you may not have the cash available to satisfy these payments.
Additionally, you may not be able to refinance when you take out a partially amortizing loan. Even if you are able to refinance, it likely won’t be with favorable terms. This can be a big disadvantage as you may be missing out on huge savings on interest due to not being able to refinance.
Which Should You Choose?
Ultimately, it’s up to you to weigh the pros and cons of partially and fully amortizing loans to decide which is best for you.
If you are sure you’ll be able to make the balloon payment at the end of your mortgage, and you were able to secure a low interest rate, then a partially amortizing loan can be a good option to give you a little bit of extra cash flow.
Before taking out a mortgage, it’s important that you understand your options so that you can choose the one that best meets your needs.