What is Non-Amortizing Loan?
A Non-Amortizing Loan is a type of loan wherein the principal balance remains constant throughout the entire period of the loan rather than declining. This repayment structure is not necessarily favorable for borrowers, as it does not allow them any reduction in their overall debt during the course of their financing agreement.
Types of Non-Amortizing Loan
Balloon mortgages are loan agreements that require the borrower to make a series of regular payments, usually over a period of five to seven years. At the end of this period, however, the remainder of the loan is due in one lump sum payment.
Interest-only loans are loans that allow borrowers to pay only the interest portion of their monthly mortgage payments for a predetermined period of time. This allows borrowers to reduce their monthly payment obligations while also still accumulating equity in their homes.
Deferred-interest programs are special loans offered by some lenders that allow borrowers to pay reduced monthly payments over an extended period. This can help borrowers more easily meet their financial obligations while they try and build up more equity in their homes.
All three types of non-amortizing loans give borrowers an opportunity to reduce or defer their payments for a certain amount of time but have different repayment structures upon maturity.
Pros and cons of Non-amortizing Loan
Taking out a non-amortization loan can be both beneficial and risky, as with any financial decision. On the positive side, because of the way these loans are structured, you may end up with lower repayments upfront than with a traditional loan. Additionally, these loans feature regular payments on the interest-only which may help free up more cash to allocate elsewhere.
However, it's important to be aware of the risks associated with this type of loan: they tend to have higher ongoing interest costs and can be difficult to restructure if your financial situation changes making them not suitable for everyone.