What Is a Level Payment Mortgage?

Malcolm Tatum

A level payment mortgage is a mortgage contract that is structured with a series of payments that are the same amount from one payment period to the next. This approach makes it possible for borrowers to easily budget the amount of the payment for each period without any concerns of the amount changing from time to time. It is possible to secure a level payment mortgage with both fixed and variable rates of interest, although the exact manner in which the plan function is slightly different.

Man climbing a rope
Man climbing a rope

With a level payment mortgage plan that comes with a fixed rate of interest, the total amount of the loan, including any interest assessed, is divided into equal payments that are made monthly or on whatever schedule is agreed upon by the lender and the borrower. Typically, a larger portion of the payments go toward settling the interest during the early stages of the agreement, but over time, more of each payment goes to settle the principal amount. This particular manner of financing real estate offers the benefit of always knowing how much interest has been paid as well as how much of the principal has been retired, with no real opportunity for any additional payments due at the end of the mortgage.

When a floating or variable rate of interest is applied to a level payment mortgage, the process is very similar but does have a slightly different outcome. The method still calls for fixed payments that go to cover both the interest due and the principal borrowed, but may call for the amount of interest applied to the principal to change from time to time. This type of negatively amortizing loan may mean that at periods during the life of the mortgage, the shifts in interest rates may create a negative situation that will increase the balance due on the loan. Assuming that the increases and declines in interest rates experienced throughout the life of the loan do not completely offset one another, there is the chance that at the end of the mortgage term, one or two additional payments may be required to totally settle the debt.

While a level payment mortgage with either a fixed or variable interest rate works well for many borrowers, there are other options to consider. A real estate professional as well as loan officers at banks, mortgage companies, and other institutions can help potential homeowners identify and compare various financing options before a final selection is made. Taking the time to explore all these options and project the outcome of each one will help make it apparent if a level payment mortgage of some type is the best approach, or if some other method would serve the interests of the homeowner to a better degree.

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