DEFINITION of 'SelfAmortizing 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 fixedrate 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 adjustablerate mortgage, it can still be selfamortizing, but because the interest rate is subject to change, the amount and breakdown of each payment cannot be known in advance.
BREAKING DOWN 'SelfAmortizing Loan'
Most traditional mortgages are selfamortizing loans; however, interestonly mortgages and payment option ARMs are examples of mortgages that are not selfamortizing. In an interestonly mortgage, the payments for a certain number of years consists only of interest, after which the mortgage becomes selfamortizing for the remaining term. On a payment option ARM, interestonly or negatively amortizing payments can be made at first, but at some point, the mortgage must begin to selfamortize. Payment option ARMs have triggers that reset the minimum payment option periodically to a selfamortizing payment to ensure that the mortgage will be paid off by the end of its scheduled term.

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