Amortization:  Amortizing a debt means to reduce the balance by paying principal and interest on an established schedule, such that at the maturity date, if payments are made as scheduled, the loan will be paid in full.

Fixed Am Loan:  Set payment amount and schedule that specifies for each payment the split between the amount applied towards Principal Reduction, and the amount paid as Interest. Although the payment amount remains constant, the amount that is applied towards Principal vs. Interest changes each month.  Each month the principal balance goes down, therefore the interest on the loan goes down.  Consequently, the amount applied towards principal goes up each month, and the amount applied toward Interest goes down.  The loan is PIF at maturity.

Simple Interest: 

Similar in that:

  • They both have a fixed payment amount that doesn’t change
  • Both split that fixed payment into a portion that is applied to Principal, and an amount that is paid for interest

How they are Different:

  • Fixed Am has a set payment schedule that is set in stone.  Regardless of when the borrower makes the payment, the amounts applied to Principal and Interest will continue to follow the Amortization Schedule that was created when the loan was created.

  • Simple Interest will look the same initially (IF the Interest Year Calculation for both is the same).  However, as soon as there is a deviation from the Am Schedule in terms of when a payment is made – whether early or late – or the amount it’s made for, it will never follow the same schedule.  Simple Interest loans will calculate the interest due at the time payment is made, pay that in full, and the balance is applied to Principal.  The borrower pays only the amount accrued.  If he pays early, he pays less interest over time.  If he pays late, he pays more interest over time.

Amort Method:

Default Setting:  Amortize based on 360/360

Amortize based on Actual Interest Year – It will do the Interest Year Calculation as usual, then go through and do it again, and again until the result is a balance of less than ½ the number of payments over the course of a loan.  For example, a 30 year loan has 360 payments, so the result shouldn’t be greater than $1.79.

NOTE:  If you override the payment, then there is no difference between these settings.

Total Payment Combined/Total Payment Separated – added for 1 client maybe 15 years ago, isn’t used.

Open Date/Origination Date = synonyms