If you were to seek a definition from a financial professional such as an independent advisor, they would probably describe an amortization mortgage as being in effect a systematic payment plan for the repayment of a mortgage, in most cases this takes the form of a regular monthly payment ensuring that your loan is paid off over an agreed and specified loan period. This definition of course then leads us to the conclusion that an amortization mortgage is simply the name given to the amount of money that is to be paid off by a certain date. Most times when you hear about amortization it refers to the schedule and amount that someone will be required to pay. The way that the amortization mortgage is usually repaid is through equal monthly installments over the period of the loan.
A mortgage can be repaid in various ways, depending upon the form and agreement the lender has agreed with the home owner. For example with an amortization mortgage the repayments are generally divided into two portions, where the first is a proportion of the principal amount of the loan itself, and the second is the interest on the loan. The repayment includes both added together on a monthly basis. The interest portion is the percent growth of the money over time, the amount that the lender is going to receive as their payment, in effect, for having loaned you the money. The interest on the mortgage is calculated based on the current amount owed, and this of means that the longer you take to repay the mortgage, the lower the interest becomes.
There are many advantages and disadvantages in Amortization Mortgage loans. The way in which such mortgages are calculated tends to be based on how an adjustable rate payment loan is calculated. This means that such an amortization mortgage is a loan where the amount you pay every month and over the length of the loan depends by and large on the rise or fall of interest rates over the period, and of course you are susceptible to large interest rate rises. You are also going to have lower payments when rates are low.
There do exist some forms of adjustable rate mortgages which offer payment caps, and the purpose of this is to limit the increased amount of your monthly payment on your mortgage, thereby making your loan negatively amortized as it is called. Where the interest rate increases to the level where the interest you have to pay cannot be covered by your monthly payment, it will particularly be the case that the unpaid amount will be added into the loan balance which of course pushes the loan up or back in terms of repayment over time.
The situation where you may end up with a negative amortization mortgage will hopefully never happen, and it can be stopped if you choose to pay the additional amount at the time rather than allowing it to be pushed back to the end of the repayment period. One of the reasons that negative amortization mortgages can be useful is that your cash flow can be more easy to control and organise, with less variability upwards every month. And keep in mind that the interest rates may well go down with an adjustable rate amortization mortgage, rather than always in an upward direction. It is frequent for many adjustable rate amortization mortgage lenders to use interest rates that adjust once in a set period, for example every six months or a year, sometimes longer periods. But the case with a negative amortization mortgage is different, they can change on a monthly basis.