The Self-Amortizing Loan The Benefits Of "˜Forced Savings'

What a time to be shopping for a new underlying mortgage! Interest rates are

again nearing a 30-year bottom and several dozen lenders are scrambling to fill their portfolios. Spreadsthe incremental amount that a lender adds to an index (such as the ten-year treasury rate) to determine a loan's interest rateare narrowing and other terms are loosening as well. To be even more competitive, a few lenders have resurrected the standing or interest only loan, a product rarely seen since the free-wheeling '80s.

The monthly payments on standing loans are substantially lower because they include just interest on the outstanding loan balance and no amount to repay the principal. These lower payments are very attractive to board members struggling to hold the line on shareholder maintenance charges. And, under certain circumstances, payments can be low enough to allow some board members to seriously discuss what they previously had only dreamed aboutreducing maintenance!

However, as appealing and politically rewarding as this might be, most boards should resist the temptation. After all, everyone has adjusted to the current level of maintenance. Any relief from a maintenance reduction will only be temporary and relatively minor. Instead, boards would be wiser to adjust the amortization schedule of their new loan to absorb most, if not all, of any savings in their monthly payment. There are six important arguments to support this recommendation. But first you'll need to understand what amortization is and how it works.

A Simple Principle


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