What is a Partially Amortizing Loan?
Partially Amortizing Home Loans
Many of us are familiar with amortization and fully amortizing loans. But not all amortized loans are fully amortizing. There are actually a subset of loans that are partially amortizing. These loans are not especially common in the home loan market, but they do exist.
A partially amortizing loan is another amortization-based payment schedule, except the entire payment isn’t amortized. Instead, there is a set period of time where an amortizing payment schedule is applied to the repayment of the loan. This can be any portion of the loan term (typically 7-9 years). Once the amortized period ends, payments on the loan can still be made monthly. However, partially amortized loans utilize payments that are calculated using a longer loan term than there really is.
Because of this, making all monthly payments on a 60-month loan for 60 months straight will not pay the entire balance. Partially amortized loans are actually designed to include a balloon payment at the time of the loan’s maturity date that must be paid in full, or the borrower defaults on the loan.
Partially amortizing loans have a few benefits, but are geared more toward for-profit mortgages. This is because of the incredibly low monthly payment amounts, coupled with the short period of time in which installments are meant to be paid. Upfront, borrowers with partially amortized loans save tons of money. The downside is the balloon payment required to pay off the loan is much larger than most can afford to pay. Because of this, partially amortized loans work best when the investment makes a profit that can cover the required balloon payment at the end of the loan term.