Mortgage is the most common credit instrument in home financing and the most frequent financing pattern is a combination of an equity contribution and a mortgage debt. But the terms of the mortgage loan are subject to wide variations which are the joint product of the borrower’s financial circumstances and the mortgage lenders attitude and policy. The elements which make up the basic home financing pattern are:
● Amount of equity contribution
● Amount of borrowed capital secured by the mortgage
● Interest rate
● Amortization or repayment schedule
The amount of the loan, the interest rate and the repayment schedule of the mortgage loan are called the “terms” of the mortgage. The payment called for, either interest alone or interest and principal retirement, are referred to as “debt service”. The repayment schedule takes one of three forms:
1-Straight Loan: Interest only is paid for a stated time period and then the full amount of the loan becomes due and payable.
2-Partial Amortization: The schedules calls for periodic interest and principal payments until a certain portion of the debt is retired at which time the balance of the debt becomes due. The final payment of this balance is known as the “balloon payment”.
3-Complete Amortization: The schedule requires periodic interest and principal payments until the debt is fully repaid. The debt service payments may be in equal amounts or may call for equal principal repayments with each interest payment determined by the then unpaid debt.
By simply varying any one of the terms of the mortgage, different levels and time patterns of debt service payments will results.
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