Self-Amortizing Loan

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.