Straight-Line Amortization vs. Mortgage-Style Amortization

Straight-Line Amortization vs. Mortgage-Style Amortization

Deciding to purchase a home is one of the biggest financial decisions you will make in your life. Therefore, it’s important to ensure you choose the right mortgage. Same applies to personal loans and auto loans – Choosing the best type of loan can save you a lot money.

When shopping around for a mortgage or a loan, you’ll find there are typically two different ways a loan can be calculated: Straight-Line Amortization and Mortgage-Style Amortization. Which is right for you? Let’s take a look at the differences.

Tip: Use our loan calculator to calculate loan repayment schedule and interest amounts.

Straight-Line Amortization

The straight-line amortization calculation is the easiest way to repay a mortgage loan. This type of calculation is sometimes referred to as a constant amortization because the amount applied to the principal of the loan remains constant with every payment.

Although the amount applied to the loan principal remains the same, the amount applied to interest varies based on the outstanding loan balance. Consequently, your installment payments will also vary. At the beginning of the loan, installment payments will usually be higher. Over time, the amount of each payment becomes lower as the outstanding balance decreases.

Mortgage-Style Amortization

The mortgage-style amortization calculation is the most traditional method for repaying a mortgage loan.

The method is sometimes referred as the constant payment method because every installment payment is the same throughout the duration of the loan. One similarity between the straight-line and the mortgage-style amortization is that in both methods of calculation, interest payments are based on the outstanding loan balance.

With this calculation, both the amount applied to the principal and the amount applied to interest change. In the beginning of the loan, more of the payment will be applied toward interest.

Advantages and Disadvantages of Straight-Line and Mortgage-Style Amortization

If you’re looking for the fastest method to reduce your outstanding loan balance, the straight-line amortization method is the best option. The mortgage-style calculation method offers the benefit of flat installment payments that do not change, which can make budgeting easier.

In the beginning, some borrowers might find the straight-line method difficult to manage because payments are larger. This can also make budgeting challenging. Since most of the interest is paid at the beginning of the loan with a mortgage-style amortization, it can take longer to reduce the principal of the loan.