Some mortgage loans are made for short terms such as one year or three years. These loans at maturity may be paid off or renewed or allowed to run as open or past due mortgages. It is a matter determined by the wishes of the lender and borrower. Some other loans are made for periods of five years or ten years. The danger of making a mortgage loan on improved property for a long term is that during the term the value of the security may depreciate. If the depreciation were only slight, it would probably make no difference to the lender, but it is conceivable that during a period of ten years, the value of a piece of property may shrink materially. The decrease in value may come about through physical depreciation or obsolescence or through changing local conditions. There may be depletion of the soil in the case of farm lands, physical depreciation of buildings due to lack of care and failure to make necessary repairs, and evolution in the types and styles of buildings make some of the old buildings obsolete. Changes in trade centers which result in business leaving a section often cause values on the old centres to decline. Examples of this may be seen in the movements of the great retail stores in New York City. When the shopping district moved elsewhere the old locality showed decreasing values. Business depressions and any condition which causes rents to be reduced naturally have an adverse effect on some realty values.

There are two ways in which the principal of a mortgage investment may be safeguarded from the effect of declining values. In the first place, a mortgage may be made for a short term, the property may be reinspected and re-appraised at each maturity and at short intervals thereafter, and reductions in the amount of the loan may be required whenever any reduction is deemed desirable. On the other hand, the mortgage may be made for a longer period with a provision that it be amortized, that is to say, that regular periodic payments be made on account of the principal during the term of the mortgage. Some of the largest lending institutions in the country are making long term mortgages with a provision for amortization of from 2% to 10% of the principal of the loan annually. Loans made under the provisions of the Federal Farm Loan Act are all amortized. Building loan associations and similar corporations require that their mortgages be paid off in installments.

The advantages of amortized loans to the lender are that the loan is constantly being reduced and made more safe and the danger of loss due to depreciation or declining value of the security is minimized. In the case of large lenders, there is a constant inflow of funds for reinvestment in other loans. The advantages to the borrower are that his debt is being paid, his equity in the property is increasing and his interest charges growing less. He also is saved the trouble and expense of renewing or replacing at short intervals and he does not have to face a possible requirement for a large reduction of the loan at one time.

There are some disadvantages to be noted in connection with amortized loans. They are not usually desirable to a private investor owning a few mortgages. He would receive on such mortgages small and frequent payments of principal, and it is often difficult to reinvest these small amounts. For such a person, a straight mortgage for a term of not too great length would seem more desirable. Many borrowers, too, are unwilling or unable to amortize their first mortgage loans. This is especially so in large cities where there is some degree of real estate activity. Investors in real property may not wish to have their incomes reduced by compulsory payments on mortgages. Builders and operators sell much property on small cash payments, taking a purchase money second mortgage in part payment. If, as is usually the case, the second mortgage is payable in installments, the owner may be unable to pay, in addition to the second mortgage installments, amounts in reduction of the first mortgage. It may be seen that no rule for amortization can be made governing every case. In some cases it is desirable, in others unwise or unnecessary. In some localities, the tendency of realty values is to increase, and if the loan is safe when made and the security increasing in value, amortization is hardly necessary.