Question

Would buying a home using a partially amortizing loan allow someone to buy a bigger house? Why?

Which would most likely have a higher payment over the first year a 3/1 ARM or a 30-year mortgage? Which one is riskier? Why?

Answer 1

A partially amortizing loan is one where the borrower pays only a part of the monthly payment that would have been due had the loan been a fully amortizing one, followed by a one-time lumpsum repayment of the outstanding loan balance at loan maturity. This essentially implies that the borrower saves on monthly repayments in return for a higher lump sum repayment at the end of the loan term. The lower monthly repayments might mean that bigger (and presumably costlier) house can be purchased subject to the condition that the borrower is able to honour the high lump sum repayment at the loan's maturity. Further, partially amortizing loans are costlier owing to the longer duration of outstanding loan balances. If the buyer is confident of being able to honour the high maturity lum sum repayment and ready to incur a costlier loan, then a partially amortizing loan is feasible owing to its lower periodic repayments. This is particularly true for borrowers who have strong expectations of an income spike with passing time.

NOTE: Please raise a separate query for the solution to the second unrelated question.