Level Payment Mortgage

What Is a Level Payment Mortgage?

A level payment mortgage is a type of mortgage that requires the same dollar payment each month or payment period. Level payment mortgages allow borrowers to know exactly how much they will have to pay on their mortgages each pay period. This stability makes it easier for them to create budgets and stick to them.

Key Takeaways

  • A level payment mortgage allows homeowners to pay the same amount each month that they are paying off their loan.
  • Many mortgages today are level payment and are fully amortizing, meaning that the payment remains level but the amount of principal vs. interest paid off changes over time.
  • A level payment mortgage may be of fixed or variable (adjustable) interest rate.
  • There is a risk of negative amortization when taking out a level payment mortgage.
  • Level payment mortgages are attractive due to their transparent nature, making budgeting much easier when compared to more complex mortgage options.

Understanding a Level Payment Mortgage

Many mortgages today are fully-amortizing, This means that both interest and principal on the loan are paid off each month. However, in a level payment mortgage, the principal and interest totals are broken down into exact payments during the entirety of the loan. This differs from a more conventional mortgage, where the amount of interest paid is greater during the beginning of the payment period and flips near the end.

With fully amortizing mortgages, level payments should cover both a reduction of the principal amount as well as pay for interest on the debt. Initially, the majority of the payment will go toward paying interest on the loan with some deductions from the balance. Over time, how the payment is applied toward the mortgage will likely shift. More of the payment will go toward reducing the balance after the interest has been diminished.

In traditional mortgages, the ratio of the two components—payments applied to principal and payments applied to interest—will change over time according to an amortization schedule. The ratio in a level payment mortgage does not change.

This type of mortgage can, however, sometimes result in negative amortization, which inflates the balance of the loan, such as with interest-only loans. These nonstandard types of home loans are thus not appropriate for all types of homeowners and can result in financial entrapment for those who do not understand the possible consequences.

The structure of level payment mortgages mixed with rising and variable rates of inflation have, from some perspectives, been cited as a contributing factor in past housing crises.

Level Payment Mortgages and Housing Crises

In the earlier meltdowns of the market, increases in interest rates meant that more capital was needed to purchase homes. This meant that as buyers sought traditional, level payment mortgages, this financing may have been established against interest rates that were inflating the prices of homes beyond their actual market value. Furthermore, anticipation of further inflation and escalation of interest rates led to unnaturally rising annual payments.

Level payment mortgages can also be referred to as straight line amortizations.

That meant the buyer could be making payments that exceeded the returns they could realistically hope to see after the mortgages were fully paid off. Especially since the early payments would have largely addressed the interest, rather than the principal balance, the homebuyer would have effectively been losing money paying excessive interest before realizing any substantial equity in the home.

By the time they actually began to pay off that principal balance, the value of the home could have dropped. That may have left them with an outstanding mortgage on a largely unpaid home that, even if sold, would not allow them to see any gain, let alone break even on the costs for the lifetime of the mortgage.

What Is a Level Payment Amortization?

Level payment amortization is a loan repayment schedule where the payments made do not change over time. The ratio of principal to interest that the payment is applied to will rebalance, the amount of the payment made does not change. This type of payment schedule can also be known as straight line amortization.

What Is a Graduated Payment Mortgage?

A graduated payment mortgage (GPM) is a type of fixed-rate mortgage where the payments increase gradually over time. These mortgages are designed to allow borrowers to make lower monthly payments at the beginning of the loan cycle, and higher payments nearing the end. However, the total amount paid could be higher than with a level payment mortgage, and the payments nearing the end of the cycle will be substantially higher than in the beginning.

What Is the Most Common Way to Finance a Home?

A fixed-rate mortgage is the most common way to finance a home. This gives buyers the comfort of knowing exactly what payments they will be required to make over the period of the loan, which makes planning much easier when compared to adjustable-rate mortgages. Choosing the right mortgage will depend on your financial security, income, and goals.

What Does Amortized Over 30 Years Mean?

Amortized over 30 years means that the loan will be fully paid off in 30 years if the borrower makes all payments according to the amortization schedule.

The Bottom Line

Level payment mortgages have many benefits for homebuyers. The predictability of payments and the transparent nature of a consistent payment schedule make it easy to budget during the entire amortization period. The amount of a payment that is applied to the principal vs. interest will change over time, but the payment required will not. This predictability makes level payment mortgages extremely attractive for homebuyers.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. The Law Dictionary. "Level Payment Mortgage."

  2. The Law Dictionary. "Level Payment Mortgage."