What is the amortization method?
Method of amortization is a planned payment plan - usually a monthly installment - created to pay off the loan for a specified period of time. Monthly payments are kept in a fixed amount until the loan is repaid. Car loans and housing mortgages usually use the amortization method.
In contrast to other repayment methods, the amortization method is caused by part of the monthly payment to interest costs and the rest is aimed at paying the amount of principal or the borrowed amount. Interest is calculated from the current amount due and will gradually decrease as the loan balance is reduced. Using this method, initial payments mainly occur to repay interest. The first few years of the loan will go very little of the payment.
There are four categories of amortic methods commonly used by creditors. Full amortization is the most popular type of loan. At the end of the loan period, the excellent loan balance will be reduced to zero. Partial amortization, on the other hand, only slightly reduces the outstanding principal of the loan with each of meby a hall payment. Payment only partial amounts at the end of the credit period will be unpaid balance.
The less popular method of amortization is a method "only interest". As the name suggests, the individual makes monthly payments that will only go to interest. At the end of the loan period, the main director's balance is the same as at the beginning. The negative method of amortization requires the lowest monthly installments. Because payments are so low, interest is added to the loan every month and the amount of the loan actually increases to the end of the loan period.
As an example, let's look at a 15 -year mortgage of $ 100,000. Using the full amortization method , the loan would be completely repaid at the end of fifteen years. With the partial amortization method, an individual would owe less than $ 100,000 at the end of the loan period. According to the method only a person would still owe at the end of fifteen yearsand a full $ 100,000. Using the negative amortization method , the individual will owe more than the original $ 100,000 until the end of the loan period.
Method of amortization is also used in terms of pension accounts. In this case, the amortization method is the method of calculating the distribution approved by the IRS, which allows early selections without punishment from personal pension accounts. However, once an annual distribution amount is determined, it is never modified according to any changes in the level of income or life.