Straightline Vs. Mortgage Style Amortization

How often you make mortgage payments can make a big difference in interest charges.

How often you make mortgage payments can make a big difference in interest charges.

Amortization is the process of reducing a debt over time, most often with a fixed time schedule of payments. A straightline amortization schedule reduces the debt with equal principal payments. A mortgage style amortization schedule reduces the debt with equal payments that include both principal and interest.

Mortgage-Style Amortization

A mortgage style amortization schedule is the loan pay-off schedule usually associated with residential mortgage loans. Let's say you borrow $100,000 to buy a new house, and you decide you want to pay it off over 30 years. A mortgage style amortization schedule divides the loan into 360 equal monthly payments. Consulting a mortgage loan payoff calculator, you see that if the interest rate is 5.7 percent, each monthly payment is $580.40. The first month's payment consists of $475.00 in interest and $105.40 in principal.

Straightline Amortization

A straightline amortization schedule divides the principal into an equal number of payments, then adds the interest due to each month's repayment amount. If you borrow $100,000 and repay it over 30 years, each month's principal repayment will be $100,000 divided by 360, which is $277.78 each month. Consulting a straightline amortization schedule, you find that your first payment includes $473.68 in interest.

Mortgage Style Advantages

Mortgage style amortization gives you a payment schedule that is the same every month. Also, most families have household income that rises over time. In addition to predictability, the big advantage of a loan with equal payments is the greater affordability over a straightline loan, where the payments are highest at the beginning, when most families can afford it least.

Straightline Advantages

The big advantage of a straightline amortization loan is that it cuts down your interest charges substantially. Over 30 years, the mortgage style loan accumulates $108,944.40 in interest charges -- more than half your total payments. Over the same time period, on the other hand, straightline amortization has total interest costs of $85,262.50, a reduction in interest charges of $23,681.90.

Bi-Weekly Payments

Another repayment schedule offers the cost-savings of the straightline amortization loan and the affordability of a mortgage style loan with 360 equal payments. If you borrow $100,000 at 5.7 percent annual interest and repay the loan with bi-weekly equal payments of $290.20 -- half the monthly mortgage style amortiztion payment -- your total interest charges will be $86,598.74, a savings of $22,345.66 over the cost of the same loan with monthly payments. You'll also pay off the loan in 24 years and nine months, five years and three months early.


About the Author

Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.

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