Over time, more of each payment goes toward repaying the principal, so that by the time a borrower reaches the end of his mortgage term, he has completely paid down both interest and principal.
Mortgages come in two main structures, self-liquidating mortgages and balloon mortgages.
With a balloon mortgage, the borrower makes consistent monthly payments for a set period of time, usually five to seven years.
However, unlike a self-liquidating mortgage, the payments do not fulfill the loan.
After the borrower has reached his initial five- to seven-year fixed-payment term, he owes the balance of the loan in full.
The balloon payment is often nearly as much as the original loan amount, but a self-liquidating mortgage avoids this by spreading out the entire balance over time.
With a self-liquidating mortgage, borrowers slowly pay off the loan, with one portion of each monthly payment going toward the principal, or how much the buyer initially borrowed, and another portion going toward interest.
Early payments contribute primarily toward paying down the interest, with only a small portion going toward the principal.
Definitions of ’self-liquidating promotion’ and meaning of ’self-liquidating promotion’ are from the book publication, QFINANCE – The Ultimate Resource, © 2009 Bloomsbury Information Ltd.
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When a borrower has a self-liquidating mortgage, she pays off the loan gradually over time, usually in 15 or 30 years, in a process called amortization.
When the borrower makes her final mortgage payment, she has paid off the entire loan and owes nothing more.