Mortgage pre-amortization: what is it? Interest calculation

13 Mar

A pre-amortization on a mortgage means a period of time in which the borrower undertakes to pay only the interest on the loaned capital . Typically, a loan, like almost all loans, provides for the loan of a capital to those who request it in exchange for the return of a larger amount to the bank: this increase corresponds to the interest to be paid on the capital, expressed by a percentage of the total amount. The methods of calculating the interest on the pre-amortization and the characteristics of their payment have a significant impact on the progress of a loan.

The expiration dates of the installments and the methods

loan  installments

Their repayment are summarized in the amortization plan, which is proposed by the bank when the loan is disbursed. The pre-amortization is a limited period of time within which the borrower is required to repay only the interest and not the loaned capital. In particular, there is talk of financial pre – amortization when a period is granted to the customer, which can also be up to 5 years under certain conditions, in which he will pay only the pre-amortization interest.

But we must pay attention and not confuse this advantage with a calculation technique of the amortization plan that concentrates the payment of interest in the first installments of the loan: the depreciation in French, this is the name of the technique in question, however, provides that in the first installments there is a share of capital. On the contrary, obtaining a pre-amortization, the share of capital will be repaid only starting from the end of this initial period.

The most typical case of pre-amortization of a real estate loan concerns mortgages due to construction or work progress

real estate loan,money

These are loans usually granted to construction companies engaged in the construction of a new building or in major renovation works. The particularity of this mortgage is that the capital is not lent in a single solution, but in several tranches, after specific appraisals have certified a correct progress of the work . Precisely in construction loans, banks often recognize a loan pre-amortization period, so as not to excessively burden the first phase of the company’s work.