In fact, it is not until the borrower has made payments for a little more than 10 years that the payment amount finally drops to that of the traditional mortgage. Once the 10-year mark is reached, however, the payments quickly decline. As a result, the fixed principal payment technique may be best initiated by a more seasoned mortgagor, for instance one who is 'rolling over' the proceeds of an appreciated home and can comfortably live with higher payments for the first few years. For such a veteran home-buyer, even these new, fixed principal monthly payments can be lower than the level periodic payments on his or her previous home. The best part is that this loan acceleration technique has a great payback.
Most lending agreements allow prepayment without penalty, especially after the first year.
A lending institution will tend to sell most mortgages, and often, even unsecured debt, in the secondary market. In a declining interest rate climate, early loan redemptions will have the effect of lowering the average yield on investors' portfolios. In a market of rising rates, investors will gladly reinvest their portfolio proceeds in higher-yielding securities. But no matter what the interest rate environment, rest assured that the original lender, and any subsequent investors, have earned a fair return on the borrower's loan for the period it remained outstanding. Many banks and finance companies, and mortgage banks and brokers, will accommodate custom loan packaging requests if asked, but will not volunteer them simply because they represent 'exceptions' to the path of least resistance.