One of the most important and costly investments people make in their life times is the purchase of a home. The decision to take out a home mortgage is a huge one; and it's extremely important that people figure out which type of mortgage is the best type for their unique situation, and make sure they have calculated the amount of mortgage they can actually afford. It's necessary also, to fully understand the rate of interest that you are paying and how it is calculated, as it will affect the amount of money you are borrowing immensely. There are a number of ways that interest rates are calculated, but most banks calculate the interest according to what is known as a loan amortization table.
Amortization is a fancy word that basically describes the number of years it will take to repay the loan completely, with interest.
There are three types of loan amortization tables that are used most frequently, including:
o Equal Capital - In this type of amortization table, the calculation system will display each of the equal monthly payments as well as the total variable payment that is made to the bank. The amount of the repayments decrease as the term of the loan gets closer to the expiration date.
o Spitzer Amortization Table - In this type of amortization table, the repayments are often considered the most optimal. A Spitzer loan provides a fixed monthly payment, even with a variable rate of interest that may adjust throughout the repayment period. Unfortunately, however, many people mistakenly believe that most of the interest is paid within the first year of making repayments on this loan, but that is not the case.
o Bolit Amortization Table - In this type of amortization table, the payments that are made pay the interest on the loan, and the principal amount of the loan is only paid after a specified period of time. So the beginning payments are interest only.
As with any investment tool, there are numerous risks associated with loan amortization tables, including:
o Linking risk
o Rising consumer price index
o Rising prime risk
o Exchange rate
o Fluctuating interest rate risk
If you are able to define the type of risk involved with the various amortization tables, then you can have a better understanding of how to best neutralize the risk.
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