Straight Line Vs. Mortgage Style Amortization

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Straight Line Vs. Mortgage Style Amortization
Learn about two different types of mortgage calculations. (home sweet home image by David Dorner from Fotolia.com)

Straight line and amortisation are two different calculations that mortgage lenders use to determine your monthly mortgage payments. Each of the two styles of calculations also determines how the principal balance on the mortgage is reduced.

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Definition

In a straight line mortgage, a mortgage lender calculates the amount of principal included in your monthly mortgage payment, where the principal amount of the payments stays the same throughout the entire term of the mortgage. In an amortised mortgage, an amortised monthly payment has principal portions of the payment that differ from month to month, where at first the majority of the payment is interest but over time, more of the monthly payment goes toward reducing the principal balance of the mortgage.

Benefits

Both styles of mortgage calculation allow you to pay off the entire mortgage amount by the end of the term of the mortgage. In both straight line mortgages and amortised mortgages, the amount of interest you pay decreases as the number of payments increases, so while you're paying more interest at the beginning of the mortgage, you start to pay less interest and more principal as the term of the mortgage progresses.

Differences

In a straight line mortgage, the monthly mortgage payments change over time. At the beginning of the mortgage, the monthly payments are higher than the monthly payments that come later in the loan term. In an amortised mortgage, the monthly interest payments stay the same throughout the entire term of the mortgage.

Time Frame

Straight line and amortised mortgages can have varying terms. Terms can be as short as 15 years or as long as 30 years. For both types of mortgages, the interest rate is generally fixed.

Features

Calculating a straight line mortgage tends to be easier that calculating an amortised mortgage. In order to calculate an amortised mortgage schedule, you have to use an online program that allows you to create an amortisation schedule or use a financial calculator. The amortisation schedule details out how much of each monthly mortgage payment is principal and how much is interest. A straight line mortgage is easier to calculate because the principal amounts of each payment stay the same throughout the term.

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