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The loan balance of a mortgage refers to the amount of borrowed money is still owed to the lender at any point in time.
Loan balance should not be confused with loan amount.
For example, for a original loan of $200,000 over 25 years, the remaining balance might be $150,000 after 5 years. This means that while the home loan started with $200,000 balance, it was reduced to $150,000 after 5 years.
It is important to note that loan balance only takes into account the principal of the loan.
This means that adding up all the remaining payments scheduled for the mortgage until the maturity of it’s term will not be equal to the loan balance.
This is simply because the monthly payments consist of principal plus interest.
When a borrower is doing a prepayment or redemption, the amount to be repaid is the outstanding principal balance. Not the total payments stated in the amortization schedule.
While the loan balance reduces with time due to recurring monthly payments towards it by the borrower, there are occasions where it can actually increase without needing the borrower’s action.
This can occur with deferred interest and negative amortization.
It happens when the interest due on payments exceed the scheduled monthly payments. The excess of the unpaid interest gets added to the principal, resulting in an increase in outstanding balance.
For example, because of volatile interest rates, the adjusted interest might cause a spike to the monthly payment to $1,200. But the fully amortizing payment that the borrower is scheduled to repay is only $1,000. So while the borrower makes a $1,000 payment with breaching any terms of the contract, the extra $200 is then added to the loan balance.
When refinancing, the loan balance is the amount of funds required. So it remains the same even when a home loan is moved to a new lender.
However, if a cash out is taken up by the borrower, the new loan balance would increase after taking into account the additional new loans.