A loan with scheduled periodic payments of both principal and interest. This is opposed to loans with interest-only payment features, balloon payment features and even negatively amortizing payment features. In banking and finance, an amortizing loan is a loan where the principal of the loan is paid down over the life of the loan (that is, amortized) according to some amortization schedule, typically through equal payments. An amortizing loan should be contrasted with a bullet loan, where a large portion of the loan will be paid at the final maturity date instead of being paid down
Gradually over the loan’s life. A significant problem posed by real estate lending is interest rate risk. Historically, rates have ranged from less than 3 percent to more than 15 percent. Most interest rate risk comes from inflation, which is volatile. Mortgage rates with the expected inflation premium deducted have tended to range between about 1 percent and 5 percent.
A fixed-amortization mortgage with an adjustable principal would avoid these problems. It would eliminate the extra costs of fixed-rate mortgages. It would also lower the risks associated with making mortgages. Banks and investors would require smaller profits to fund those mortgages because they would not be carrying the duration risk of fixed-rate mortgages. This would make less risky loan terms more competitive.
