Types of Notes and Loans
January 6, 2020
Brad Barker
Types of Notes and Loans
Once the borrower has signed the promissory note which creates the debt, then the borrower has to pay off the money that was promised to be paid. There are several ways that the borrower can pay off the money that was borrowed. One type of note is called a straight note or a term loan, these two terms meaning the same thing, where the borrower pays interest only. This is typical on a short-term construction loan that may be only in effect for say six months. Another type of payment plan is called a partially amortized note. Amortized means the payments are going toward both principal and interest, principal being the loan balance or the loan amount. With a partially amortized note, the borrower partially pays down the loan over the term leaving a balance still left over at the end of the loan term.
That balance is then paid off with what is called a balloon payment, which is the final payment, paying off the loan balance in full. A third type of payment plan is called a fully amortized note, fully amortized is what most of us think about with a typical 30-year home loan. Fully amortized means that the payments are applied to principal and interest and the loan is totally paid off over the term, so at the end of the 30 years the borrower owns the home free and clear. Another type of note is called a graduated payment note, although not used too often today. A graduated payment note is where the payments are lower initially with the loan and then they graduate or go up every year. Typically for five years in a row. After five years of payments, they will then level off.
Adjustable Rate Mortgage
An adjustable rate mortgage is a type of payment plan where the interest rate can change typically each year based on certain economic indexes. So, with an adjustable rate mortgage, the interest rates can change, the payments can change, all things can change with an adjustable rate mortgage. One final thing to remember here. If a borrower wants to pay off the loan quicker and not pay as much interest, the borrower many times can make extra payments toward the principal, which will reduce the loan balance quicker and reduce the total number of payments that will have to be made over the term of the loan.
