The mortgage loan is amortized like all other forms of credit. The bank generally leaves the borrower the choice of the repayment formula best suited to their situation.
The question of which type of amortization to adopt depends on a good understanding of what is meant by amortization and what it entails.
Definition
The amortization of a mortgage loan corresponds to the repayment of the borrowed capital. To avoid any confusion, it should be clarified that a loan consists of two different realities. On one side, there is the amount requested by the borrower, which is the subject of the loan, i.e., the capital, and on the other, the interest collected by the bank in return for its services.
There are situations where the amortization of the mortgage loan allows for a tax deduction. It is advisable to inquire about the required conditions.
What is an amortization plan?
When concluding a mortgage loan contract, such as real estate solutions, the financial institution and the borrower agree on a repayment plan, which includes elements such as monthly payments and the repayment period. A repayment schedule is then drawn up in concert.
This is an amortization plan whose objective is to precisely indicate how the loan will be repaid and the amount of each monthly payment.
What are the different types?
There are 3 possible types of mortgage loan amortization:
- The first consists of making a regular repayment of constant monthly payments. During the initial period, the interest portion of this amount will be more substantial compared to the capital. At the end of the contract, it will be the opposite since there will be more capital than interest in each payment.
- The mortgage loan can also be amortized in a way that the total interest is repaid throughout the term. Only at the end of the loan will the borrower repay the capital in full along with the interest corresponding to the last monthly payment.
- Another alternative consists of repaying a fixed amount of capital in each monthly payment. The capital portion to be included in the payment will be calculated by simply dividing the capital by the number of months relative to the amortization. As for the interest, it will be repaid in a decreasing manner as the contract progresses towards its term.
Which solution should you choose? This question is not simple, and the final choice generally depends on the duration and the amount borrowed. It is therefore always preferable to contact a specialist to get the appropriate answer for your situation.
