Amortized loans allow you to repay only the amount borrowed, plus the accumulated interest. This means you are required to make complete and potentially extra partial repayments of principal during your term, as long as there is no prepayment penalty, as all outstanding principal amounts - along with any unpaid accrued interest - are paid off at maturity.
In layman's terms, an amortized loan is a method of repaying borrowed money in equal installments over a set period of time.
Common examples of amortized loans include a mortgage, a student loan, and an auto loan. An unamortized loan is very similar, but differs in one key aspect: rather than being paid back over time, the full balance is repaid at once (or upfront). Unamortized loans include lines of credit, some home equity loans, and even cash-out refinancing options.
The benefit of amortized loans is that your monthly repayment amounts are usually more manageable. The downside is that you may have to pay interest for a longer period of time compared with an unamortized loan. With large loans that are paid back over a long period, like a mortgage, this extra interest soon adds up to a larger sum.
By getting a mortgage quote and comparing mortgage loan programs, you can minimize these interest payments over time. If you are planning on moving home, Mortgage Quote is here to help. We can compare offers from a range of top lenders to help you.