Full Amortization Term
Definition
Full Amortization Term refers to the total duration required to fully repay a mortgage through regular installments that cover both the principal and interest. Each payment reduces the outstanding loan balance until the loan balance reaches zero by the end of the term. This process ensures that borrowers will not have any remaining balance or balloon payment at the end of the term.
Examples
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Standard 30-Year Mortgage:
- A mortgage with a principal amount of $200,000 at a 4% annual interest rate.
- Monthly payment: approximately $954.83.
- Full amortization term: 30 years.
With this structure, the borrower would fully repay their loan over 360 monthly payments without any residual balance.
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10-Year Mortgage:
- A smaller loan of $50,000 at a 5% interest rate.
- Monthly payment: approximately $530.33
- Full amortization term: 10 years.
The loan would be completely paid off after 120 monthly payments.
Frequently Asked Questions (FAQs)
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What happens if I make extra payments?
Extra payments applied toward the principal can shorten the full amortization term, allowing you to pay off your mortgage quicker and saving you interest costs over time.
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Can the full amortization term be changed?
Yes, refinancing your mortgage can potentially change your full amortization term. You may either shorten or extend the repayment period based on the new loan terms.
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Is the full amortization term the same for all mortgages?
No, the full amortization term can vary widely. Common terms include 15, 20, 30, or 40 years depending on the lender’s offerings and the borrower’s choice.
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What is the impact of interest rates on the full amortization term?
Higher interest rates result in higher monthly payments for the same loan amount, potentially making shorter-term loans more challenging to afford. Thus, lower interest rates can significantly benefit borrowers seeking shorter amortization periods.
- Amortization: The process of spreading out a loan into a series of fixed, periodic payments over its term.
- Principal: The original amount of money borrowed that must be repaid.
- Interest: The charge for borrowing the principal amount.
- Refinancing: Replacing an existing loan with a new loan, often with different terms.
Online Resources
References
- “Mortgage Mathematics: With Computer Applications” by Don H. Epley.
- “Principles of Real Estate Practice” by Stephen Mettling and David Cusic.
Suggested Books for Further Studies
- “The Real Estate Wholesaling Bible” by Than Merrill.
- “Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques” by Frank J. Fabozzi.
- “Real Estate Finance & Investments” by William Brueggeman and Jeffrey Fisher.
Real Estate Basics: Full Amortization Term Fundamentals Quiz
### What does the full amortization term define?
- [x] The total time to repay the mortgage completely
- [ ] The interest rate of the loan
- [ ] The loan origination fees
- [ ] The amount of annual property taxes
> **Explanation:** The full amortization term is the duration required to fully retire the mortgage through periodic payments of principal and interest.
### What effect does making extra monthly payments have on the full amortization term?
- [x] It shortens the term
- [ ] It extends the term
- [ ] It increases the monthly payments
- [ ] It doesn’t affect the term
> **Explanation:** Making extra payments towards the principal reduces the outstanding loan balance more quickly, thereby shortening the full amortization term.
### Which of these could potentially change your full amortization term?
- [ ] Property improvement loans
- [ ] Extra insurance premiums
- [x] Refinancing the mortgage
- [ ] Getting a home warranty
> **Explanation:** Refinancing your mortgage can adjust your loan conditions, which may change your full amortization term by setting new repayment schedules.
### A 30-year mortgage is a typical example of a full amortization term of how many months?
- [ ] 240 months
- [ ] 120 months
- [ ] 360 months
- [ ] 60 months
> **Explanation:** A typical 30-year mortgage has a full amortization term of 360 months.
### How does a higher interest rate affect the loan’s full amortization term?
- [x] Results in higher monthly payments, making it harder to opt for shorter terms
- [ ] Lowers monthly payments
- [ ] Decreases the total loan amount
- [ ] Changes the principal amount alone
> **Explanation:** Higher interest rates increase the monthly payments needed for a given loan principal, making shorter terms more expensive or challenging.
### What is primarily included in each periodic mortgage payment in a fully amortizing loan?
- [ ] Only principal
- [x] Both principal and interest
- [ ] Principal and taxes
- [ ] Are fixed at the initial rate
> **Explanation:** Each periodic mortgage payment in a fully amortizing loan includes both principal and interest.
### Extending the full amortization term would have which possible effect?
- [ ] Decrease interest rates
- [ ] Increase immediate loan-to-value ratios
- [ ] Decrease total interest paid
- [x] Lower monthly payments
> **Explanation:** Extending the amortization term generally results in lower monthly payments, though more total interest may be paid over the life of the loan.
### What must you do to get a mortgage fully amortized?
- [ ] Ignore interest and pay only principal
- [ ] Make occasional payments
- [ ] Pay utility bills
- [x] Meet all scheduled payments until the term ends
> **Explanation:** To fully amortize the mortgage, the borrower must make all scheduled payments consistently until the loan period concludes.
### Who typically determines the full amortization term for a mortgage?
- [ ] The property seller
- [ ] The government
- [x] The lender and borrower during loan origination
- [ ] Real estate agents
> **Explanation:** The full amortization term is typically decided by both the lender and the borrower when originating the loan, based on terms agreed upon.
### Which of these terms is closely related to full amortization term?
- [ ] Zoning laws
- [ ] Property taxes
- [x] Amortization schedule
- [ ] Building codes
> **Explanation:** The full amortization term is closely related to the amortization schedule, as it outlines the timeline for repayment.
