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Definition of Amortization
- The process of gradually paying down the principal of the loan. As each payment toward principal is made, the mortgage amount is reduced or amortized by that amount. This is in contrast to an interest-only payment where the principal balance is never reduced. The normal amortization period for a mortgage in Canada is 25 years, but can be as short as 5 years.
Related Terms and Acronyms
- Amortization Table — Bank,
- A mathematical formula used to calculate monthly mortgage payments based on the borrowed loan amount, the interest rate, and the loan term.
- Simple Interest (SI) — Bank, Important,
- Interest computed only on the principal balance, without compounding.
- Reverse Mortgage — Bank, Important,
- A loan that allows an older homeowner to convert built-up equity into cash. The loan comes due when the owner dies, sells the house or moves out.
- Conventional Mortgage — Definition, Important,
- A mortgage that is not insured or guaranteed by CMHC or GE Capital.
- Modification — Bank,
- A change in terms of the loan agreement.
- Interest Only Payments — Bank,
- A payment plan where only the interest is paid off.
- Variable Rate Mortgage (VRM) — Acronym, Very Important,
➥ A type of mortgage loan offered by brokers and lenders.
- Home loan in which the interest rate is changed periodically based on a standard financial index. Also called an "Adjustable-rate Mortgage."
- Pre-payment — Bank,
- Applying additional payments towards the balance of a mortgage loan.
- Amortized Loan — Bank,
- A loan that is completely paid off, interest and principal, by a series of regular payments that are equal or nearly equal.
- Amortization Period — Bank,
- The amount of time it will take to pay off a mortgage by making routine payments.
- Biweekly Accelerated Payment — Definition,
- A mortgage that schedules payments every two weeks instead of the standard monthly payment. The 26 biweekly payments are each equal to one-half of the monthly payment. The result for the borrower is a substantial reduction in interest payments because the mortgage is paid off sooner.
- Reconveyance — Definition,
- The transfer of title to the borrower after a mortgage has been paid fully.
- Interest Rate (IR) — Bank, Very Important,
- The rate a lender charges an individual to borrow money.
- Balloon Mortgage — Definition,
- A loan that has regular monthly payments which amortize over a stated term but call for a final lump sum (balloon payment) at the end of a specified term, or maturity date, such as 10 years.
- Simple Interest Loan — Bank,
- A method of allocating the monthly payment between interest and principal. The interest charged is determined by the unpaid principal balance on the loan, the interest rate, and the number of days since the last payment. The rest of the payment goes to the principal. Making early payments or additional payments reduces the loan's principal and cuts the total interest paid over the life of the loan.
- Mortgage Renewal — Definition, Very Important,
- A renewal as it pertains to the mortgage industry is defined as having an existing mortgage term end and signing a new term to continue.
- Negative Amortization — Bank,
- A gradual increase in loan debt that occurs when the monthly payment does not cover the entire principal and interest due. The shortfall is added to the remaining balance which creates "negative" amortization.
- Amortization Schedule — Bank,
- A detailed table showing the amortization of a loan which includes the beginning principal amount, period payments, the interest portion of each payment, the principal reduction portion each payment, and the ending balance. The Canadian Equity Group has developed a mortgage rate calculator which will generate a perfect example of an amortization schedule.
- Term — Bank,
- The length of time you commit to repay a lender or bank at an agreed upon interest rate and payment schedule. The interest rate usually remains constant during this term unless the commitment states otherwise. For example, a five year fixed rate mortgage has a term of five years.
- Compound Interest — Bank,
- Interest that is calculated by adding the interest earned in the current period to the principal and figuring the next period's interest on this "compounded" total amount.
- Amortization Term — Bank,
- The time required to amortize (repay) an entire mortgage loan.
- Remaining Term — Bank,
- The time it will take to pay off the rest of an instalment loan as scheduled.
- Additional Principal Payment — Bank,
- Extra money included with a loan payment to pay off the amount owed faster. Over time, this practice reduces the amount of interest paid.
- Pre-computed Loan — Bank,
- With a pre-computed loan, the interest owed over the life of the loan is calculated using a standard amortization table. After signing for this type of vehicle loan, the borrower is obligated to pay back principal plus the full amount of interest that will accrue over the entire term of the loan.
- Interest Adjustment Date — Bank,
- The date one month prior to the beginning of amortization when accrued interest computed on the monies advanced becomes due.
- Loan Term — Bank,
- The period specified in the promissory note for a borrower to pay a loan, such as a mortgage. Most conventional mortgages have a loan term of 5 or 10 years.
- Fixed Rate Mortgage (FRM) — Acronym, Very Important,
- A loan in which the interest rate and payments remain the same for the entire life of the loan. The interest rate and payment amounts are set at the time of loan origination.
- Mortgage Calculator — Definition, Very Important,
➥ CanEquity's mortgage calculator has been rated number one by the Globe and Mail.
- A program that calculates the costs involved in a mortgage or determines what kind of mortgage a person can qualify for.