Endowment Loan


DEFINITION of 'Endowment Loan'

A type of mortgage in which the borrower makes only interest payments on the mortgage, while payments that would have gone to repay the principal are instead funneled into an endowment fund. Under an endowment loan, the borrower does not repay the principal until the mortgage expires.

BREAKING DOWN 'Endowment Loan'

Endowment loans offer many incentives for borrowers, however, they can be riskier than traditional mortgages. When repaying an endowment loan, borrowers have a lower monthly payment, since no principal is being repaid. During good economic conditions, contributing to the endowment fund allows the borrower to earn interest on money that would have been repaid as principal.

The main risk with an endowment loan is derived from investing in the fund. Because no principal is repaid during the life of the mortgage, the borrower must rely on the investments performing well. If the fund loses value, the borrower could lose much of his or her investment in the endowment fund, but will still be required to pay the full mortgage amount.

  1. Endowment

    A financial asset donation made to a non-profit group or institution ...
  2. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense ...
  3. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  4. Conventional Mortgage

    A type of mortgage in which the underlying terms and conditions ...
  5. Loan

    The act of giving money, property or other material goods to ...
  6. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
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