Loan amortization is basically a fancy term that refers to the process of paying back your loan through regular payments over time. Your amortization schedule is simply the schedule of payments that must be made to pay your loan off within its term at its rate of interest whether that term is 10, 15 or 20 years.
For instance, a 30 year fixed rate mortgage would have an amortization schedule of 360 payments, at the end of the term it would be fully paid off. That loan would be considered fully amortized. All that means is that the required payments will pay off the entire loan by the end of the term. Fixed rate mortgages are fully amortizing loans.
Other types of loans, such as hybrid ARMS, may also be fully amortized, or they may be partially amortized. In the case of the fully hybridized ARM, the payments and interest rate may change over time, but the loan payments are still calculated at a rate that means the loan will be paid back at the end of the term.
However, a balloon loan, for instance, is only partially amortized. That means that the payments are artificially kept low by being calculated as if they were actually on a longer amortization schedule. Therefore, the entirety of the loan would not be paid off by the end of the term. At that point, you must make the balloon payment, theoretically, by refinancing or selling the property.
Interest-only loans are called delayed amortization loans. These loans require interest only payments for a certain time, and then fully amortize over the remaining term of the loan. Because they start to amortize later, there can be a substantial jump in payments when the principal payments kick in, because the loan is being amortized over a shorter amount of time. Often, these loans will also carry a higher interest rate, since they are generally given to subprime borrowers.
If you have a loan where your minimum payment is actually less than the interest on your loan, you are in a negative amortization situation. In this case, your loan balance actually increases over time and the loan is never paid off. If you dont want to be in increasing debt for the rest of your life, it is advisable to get out of a negative amortization situation as soon as possible.
