What is Level Pay?
The term “level pay” is used in several different senses in the financial world. All refer to making monthly recurring bills consistent so that they are more predictable and easy to manage. Level pay plans are available through some utilities to assist customers with the management of their utility bills, and it is also possible to have a level pay mortgage through certain lenders. There are advantages and disadvantages to such plans which people should weigh before signing up.
In the case of a mortgage, in a level pay plan, payments of principle and interest remain consistent throughout the life of the mortgage. This is not conventional. Usually in the early years of a loan people pay primarily interest and a small amount of the principle each month, and over time the ratio switches, with people paying mostly on the principle, with a small percentage of each payment going to interest.
When people have a level pay mortgage, they pay the same amount to principle and interest each month. The amounts are calculated so that the principle and the interest will both be paid off over the life of the loan. One advantage to level pay is that it allows people to build up equity more quickly because they are paying down more of the principle every month. A loan officer should be able to provide people with comparisons of different types of loans so that they can see how much monthly payments will be and how much will be paid over the life of the loan.
With utilities, level pay programs allow people to pay the same amount every month. The utility uses a customer's usage record to determine approximately how much electricity, gas, water, or heating fuel is used over the course of a year, and this amount is divided by 11. For 11 months, the customer pays the exact same amount every month. In the 12th month of the year, the customer may receive a credit because he or she used less than expected, or may receive a statement due and need to pay more.
While monthly payments should theoretically be the same with a level pay program from a utility, sometimes the utility will adjust payment amounts. This is done when utility rates change or when usage rates appear to be changing, usually with the goal of avoiding a situation in which customers are surprised by an unusually high balance due in the 12th month. Level pay plans can help people budget more effectively because the utility bill becomes fixed, rather than fluctuating.
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