The loan balance describes the principal amount of a loan that is outstanding at any given point in time.

While a loan amount is the amount of funds that was initially borrowed from a lender, the loan balance is referred to at a certain time after the principal is reduced from the monthly payments.

For example, a loan amount was $100,000 a year ago and now the loan balance is $94,000. The reduction of $6,000 is due to the monthly installment which reduces the principal.

A mistake that homeowners often make, especially when considering prepayment, is to confuse the loan balance with the total payment that would be made after adding up all the remaining payments as set out by the amortization schedule.

This is incorrect.

An amortization table shows a borrower the amount that has to be paid in monthly installments, and the portions of those payments that go towards principal and interest.

This means that the monthly debt obligations are paid towards principal and interest. Therefore, summing up all the remaining payments will not be equal to the loan balance.

Using the wrong figure will mean that all the calculations on savings around your budget would be wrong as well.

The best way to determine the loan balance is to call up the account servicing department of the lender and inquire about it.

There is no point working out the numbers yourself and finding out from the bank later that your numbers are wrong.

This can especially be the case with adjustable rate mortgages as the initial amortization table have not accounted for fluctuating interest rates affecting the monthly payments.

In certain circumstances like accrued interest caused by negative amortization, the phenomena of the loan balance increasing instead of decreasing can occur.

These situations can occur when the payments made are insufficient to pay for the interest charges incurred.

Whereas a deflated mortgage can arise when a lender agrees to reduce the principal loan balance in exchange for higher rates on the loan.