Payment Calculations

Be sure you understand how much your monthly payments will be and what they cover. With some loans, you will be required to make monthly payments on the principal and interest. With other loans, you may be required to pay interest only on the borrowed amount. With these loans, your monthly payments will not reduce the principal amount of the loan. With such a loan, you will be required to pay back the entire borrowed amount at the end of the loan period. These loans are popularly known as "balloon loans." If your loan has a balloon payment, you should consider how you will arrange to repay the entire amount when it becomes due.

On "home equity lines," the mortgage company does not have to give you the exact amount of the monthly payment, but must explain how it is figured. This is because the borrowed amount will vary and your outstanding balance will change if you use the line of credit. However, if your monthly payment term is 5% of the outstanding balance and your outstanding balance is $5,000, your minimum monthly payments would be $250.