Participation Week 3

When the bank lends a loan for mortgaging a house over longer period of time, it is actually

losing out on an opportunity to invest it somewhere else and earn profits. The amount of

money in hand now is worth more than it will be after they receive the loaned amount, so the

bank charges the loan payer with a rate of interest which includes the inflation rate, time

value of money and the profits they wish to make.

A loan payment might also be amortized, which means that the loan payer makes payments

to some part of the interest first and then towards the principal amount when all the interest

has been paid off. At the beginning of the loan period, most of the loan payments go towards

the interest and as the interest amount is fully paid, the principal amount starts to get paid off

and eventually reduces to zero. Whereas, in a simple loan payment, the amount of interest to

be paid off remains constant throughout the loan period.An amortization loan can prove to be

beneficial for the loan payer when mortgaging a house as most of the payments first go

towards the interest which are tax deductible (Chambers et al, 2008) and reduces the amount

of tax that the loan payer eventually has to pay to the government. Another benefit is that the

interest payments are smaller in amount when compared to the principal amount payments

which are not demanded until the later years of the loan period so it’s easier to pay off.

Therefore, every homeowner who wishes to mortgage loan payments must look for an

amortization loan.

References –

1. Chambers, M.S. , Garriga, C & Schlagenhauf, D. (2008) Mortgage Innovation,

Mortgage Choice, and Housing Decisions. Federal Reserve Bank of St. Louis Review,

90(6), 565-608.