DEFINITION of 'Self-Amortizing Loan'

A loan for which the periodic payments consist of both principal and interest such that the loan will be paid off by the end of a scheduled term. Assuming the loan is a fixed-rate loan, the amount of each payment and the breakdown of the principal and the interest that comprise each payment can be known in advance. If the loan is an adjustable-rate mortgage, it can still be self-amortizing, but because the interest rate is subject to change, the amount and breakdown of each payment cannot be known in advance.

BREAKING DOWN 'Self-Amortizing Loan'

Most traditional mortgages are self-amortizing loans; however, interest-only mortgages and payment option ARMs are examples of mortgages that are not self-amortizing. In an interest-only mortgage, the payments for a certain number of years consists only of interest, after which the mortgage becomes self-amortizing for the remaining term. On a payment option ARM, interest-only or negatively amortizing payments can be made at first, but at some point, the mortgage must begin to self-amortize. Payment option ARMs have triggers that reset the minimum payment option periodically to a self-amortizing payment to ensure that the mortgage will be paid off by the end of its scheduled term.

RELATED TERMS
  1. Amortization Schedule

    A complete schedule of periodic blended loan payments, showing ...
  2. Deferred Interest

    The amount of interest that is added to the principal balance ...
  3. Interest Due

    The portion of a current mortgage payment that is comprised of ...
  4. Non-Amortizing Loan

    A type of loan in which payments on the principal are not made, ...
  5. Deferred Interest Mortgage

    A mortgage loan that allows the borrower to make minimum payments ...
  6. Payment Shock

    The risk that a loan's scheduled future periodic payments may ...
Related Articles
  1. Personal Finance

    Choose Your Monthly Mortgage Payments

    Exotic mortgages allow you to decide how much to pay. Find out how much they really cost.
  2. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  3. Personal Finance

    5 Risky Mortgage Types To Avoid

    There are plenty of ways to end up with a bad mortgage. The risks of these five should make every homebuyer think twice before signing.
  4. Personal Finance

    Option ARMs: American Dream Or Mortgage Nightmare?

    Option adjustable rate mortgages could make or break your home-buying experience.
  5. Personal Finance

    Interest-Only Mortgages: Home Free or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
  6. Personal Finance

    This ARM Has Teeth

    Find out how to avoid getting bitten when your mortgage rate resets.
  7. Personal Finance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  8. Personal Finance

    What is an Amortization Schedule?

    An amortization schedule is a table that shows the amounts of principal and interest that comprise each loan payment.
RELATED FAQS
  1. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  2. When Do Mortgage Payments Usually Start?

    Discover when your first mortgage payment is due and how it differs from rent. Learn about the closing process and why you ... Read Answer >>
  3. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  4. Are Student Loans Amortized?

    Student loans typically get paid back over time on a fixed payment, or amortized, schedule. Read Answer >>
Trading Center