Self-Amortizing Loan

AAA

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.

INVESTOPEDIA EXPLAINS '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. Principal

    1. The amount borrowed or the amount still owed on a loan, separate ...
  3. Fully Amortizing Payment

    A periodic loan payment, part of which is principal and part ...
  4. Interest

    1. The charge for the privilege of borrowing money, typically ...
  5. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
  6. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
RELATED FAQS
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  3. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  4. How was the American Dream impacted by the housing market collapse in 2008?

    The American Dream was seriously damaged by the housing market collapse in 2008. In many ways, the American Dream is a self-fulfilling ... Read Full Answer >>
  5. How much risk is associated with subprime mortgages?

    A large amount of risk is associated with subprime mortgages. Since the mortgages are specifically for people who do not ... Read Full Answer >>
  6. What are the financial consequences of filing for bankruptcy?

    The financial consequences of filing for bankruptcy are substantial and can be long-lasting. They include impacts on your ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    How Mortgage Refinancing Affects Your Net Worth

    Find out how to determine whether refinancing will put you ahead or even more behind.
  2. Options & Futures

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  3. Home & Auto

    Option ARMs: American Dream Or Mortgage Nightmare?

    Option adjustable rate mortgages could make or break your home-buying experience.
  4. Credit & Loans

    Calculating Interest Expense

    Interest expense is the cost of borrowing money.
  5. Economics

    What is a Subprime Mortgage?

    Subprime mortgages are offered to borrowers with low credit ratings, usually 600 or below.
  6. Home & Auto

    Strategies To Buy The Perfect Vacation Home

    Ask yourself these six questions to make the right decision about a vacation property.
  7. Economics

    How Does a Lien Work?

    A lien gives a creditor the legal right to seize and sell property, then use the proceeds to pay off a borrower’s debt.
  8. Retirement

    Is Your Mortgage Robbing Your Retirement?

    If you picked the mortgage with the lowest possible monthly payment, you may be blowing what could be your retirement money on mortgage interest.
  9. Credit & Loans

    How Interest Rates Work On A Mortgage

    A step-by-step explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off.
  10. Credit & Loans

    The Homebuyer's Guide To Jumbo Mortgages

    What they are – and what it takes to get one.

You May Also Like

Hot Definitions
  1. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  2. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  5. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!