Annuity amortization is the process of making regular payments that are used to pay down a relatively large amount of loan, which is usually utilized for the purchase of a house. Each payment that is made has two components. The first component is provided as a contribution to the payment of the total interest for the loan while the other component is used for the gradual repayment of the actual loan amount, which is also called the principal.



There are various types of loan amortization strategies and one of these is linear or straight line amortization where the regular payments or installments do not change in value from the start to the finish unless there is a provision for an adjustment in the interest rate. If the interest rate is increased, the monthly payment will also increase and this amount will be maintained until the rate changes again. If the interest rate goes down, the regular amount to be paid will also decline and this will continue until an adjustment in the rate is made again. In general, however, the mortgage agreement is such that a fixed interest rate will be used from the beginning of the mortgage until its completion. This will greatly simplify the computation and the borrower will only need to keep in mind a single amount that will have to be paid on a regular basis.



Linear or straight line amortization is preferred in most home loans because of a number of advantages. As mentioned above, the borrower will only have to remember a single value when making the payments. This will greatly simplify the borrower's budgeting task. The payment burden will also tend to become lighter through the years even if it is the same in amount, assuming that the borrower is able to increase his or her income generation capability. It should be noted that at the start, the component that is used for paying the interest is much larger than the part that is used for paying down the principal. Every month, the interest component will be reduced slightly while the amount used for repaying the principal is increased by this same value.

Negative amortization is a special kind of arrangement where the amount paid is insufficient to cover for the interest charged for that particular period. The unpaid amount for the interest is added to the loan balance so that this will grow in time. Naturally, this cannot be allowed to continue for an indefinite period of time. Therefore, there is usually a recast feature that will bring it back to a regular amortization schedule. The recast period or the length of time allowed for the lower payments cannot be more than 60 months or five years. In addition, the loan agreement usually contains a provision that automatically brings the loan back to the regular payment schedule if the borrower's payments are too low and the principal balance reaches a certain pre-determined value.