Before you can make any meaningful comparison of the types of loans available, you must compare the required monthly payments. There are loans where the monthly payment is the primary feature of the loan. When you apply for one of these loans, you are looking at the monthly payment as the reason for taking this loan over a loan with similar or the same interest rate, term, etc.

Without taking into consideration additions to your monthly payment amount, such as for PMI and funds in escrow for taxes and insurance, your monthly payment is made up of two components, principal and interest. Principal is the amount of money that you borrowed or owe on the loan at any given time. Interest is most easily understood as the rent you are paying for the use of the principal. As you pay down the principal amount, you pay less interest.

In a standard loan, called an interest included, level payment loan, your payment is the same each month. However, how the money is allocated between principal and interest changes.

Example: If your loan is for $100,000 and your payment is

$1,000 per month, very little of your first payment will go toward principal. This is because you are paying interest on $100,000 dollars.

If, of your $1,000 payment, $100 goes toward principal reduction and $900 is interest, you will have a slightly higher amount going toward principal reduction and less to interest on your next payment. This is because your first payment reduced your principal balance (the amount you owe) by $100. With your second payment, you are paying interest on $99,900 instead of $100,000.

As you keep making payments and reducing the principal amount of your loan, the allocation of the monthly payment will continue to change. When you reduce your principal balance by half, for example, more of your payment will be going to principal than to interest. When you get close to paying off your loan, almost all your payment will go to principal.

Other payment plans exist that differ from the standard plan and can be of benefit to some borrowers. One plan, which concerns only the payment aspect of the loan, can be used with any type of principal reduction loan. This is the biweekly payment plan. A second is a specific type of loan that has payment amounts as its main feature. It is the graduated payment mortgage. The third is the interest-only mortgage, which features the lowest possible payment over the life of the loan. The final one is a cross between interest only and full amortization. This is the balloon payment mortgage.