What is a 'Fully Amortizing Payment'

Fully amortizing payment refers to a periodic loan payment, where if the borrower makes payments according to the loan's amortization schedule, the loan is fully paid-off by the end of its set term. If the loan is a fixed-rate loan, each fully amortizing payment is an equal dollar amount. If the loan is an adjustable-rate loan, the fully amortizing payment changes as the interest rate on the loan changes.

BREAKING DOWN 'Fully Amortizing Payment'

To illustrate a fully amortizing payment, imagine someone takes out a 30-year fixed-rate mortgage with a 4.5% interest rate, and his monthly payments are $1,266.71. At the beginning of the loan's life, the majority of these payments are devoted to interest and just a small part to the loan's principal, but near the end of the loan's term, the majority of each payment covers principal and only a small portion is allocated to interest. Because these payments are fully amortizing, if the borrower makes them each month, he pays off the loan by the end of its term.

 

Fully Amortizing Payments Versus Interest-Only Payments

In contrast, if a borrower is not making fully amortizing payments, he is not on schedule to pay the loan off by the end of its term. On any loan that allows the borrower to make payments that are less than the fully amortizing payment early in the life of the loan, fully amortizing payments later in the life of the loan are significantly higher than the loan's initial payments.

To illustrate, imagine someone takes out a $250,000 mortgage with a 30-year term and a 4.5% interest rate. However, rather than being fixed, the interest rate is adjustable, and the lender only assures the 4.5% rate for the first five years of the loan. After that point, it adjusts automatically.

If the borrower were making fully amortizing payments, he would pay $1,266.71, as indicated in the above example, and that amount would simply increase or decrease when the loan's interest rate adjusts. However, if the loan is structured so the borrower only pays interest payments for the first five years, his monthly payments are only $937.50 during that time, but they are not fully amortizing. As a result, after the introductory interest rate expires, his payments may increase up to $1,949.04. By taking non-fully amortizing payments early in the life of the loan, the borrower essentially commits to making larger fully amortizing payments later in the loan's term.

Other Types of Loan Payments

In some cases, borrowers may choose to make fully amortizing payments or other types of payments on their loans. In particular, if a borrower takes out a payment option ARM, he receives four different monthly payment options: a 30-year fully amortizing payment, a 15-year fully amortizing payment, an interest-only payment, and a minimum payment. He must pay at least the minimum, but if he wants to stay on track to have the loan paid off in 15 or 30 years, he must make the corresponding fully amortizing payment.

RELATED TERMS
  1. Amortization Schedule

    An amortization schedule is a complete schedule of periodic blended ...
  2. Amortized Loan

    A loan with scheduled periodic payments of both principal and ...
  3. Flexible Payment ARM

    A type of adjustable-rate mortgage that allows the borrower to ...
  4. Fixed-Rate Payment

    A fixed-rate payment is the amount due every period by a borrower ...
  5. Deferred Interest

    The amount of interest that is added to the principal balance ...
  6. Standing Mortgage

    In contrast with a normal mortgage, standing mortgages are a ...
Related Articles
  1. 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.
  2. Personal Finance

    Interest-Only Mortgages: Home Free or Homeless?

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

    Option ARMs: American Dream Or Mortgage Nightmare?

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

    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.
  5. Personal Finance

    Simple Interest Loans: Do They Exist?

    Yes, they do. Here is what they are – and how to use them to your advantage.
  6. Personal Finance

    How to Get a No Down Payment Mortgage

    There are only a few ways to get out of making a down payment, but the requirements are strict.
  7. Personal Finance

    How Interest Rates Work On Car Loans

    Three big facts to know – and some numbers to crunch to get the best deal.
  8. Investing

    Payment Option ARMs: A Ticking Time Bomb?

    With these mortgages the loan's principal can continue to increase - even as payments are made.
RELATED FAQS
  1. Are Student Loans Amortized?

    Student loans typically get paid back over time on a fixed payment, or amortized, schedule. Read Answer >>
  2. Which is better, a fixed or variable rate loan?

    Interest on variable interest rate loans move with market rates; interest on fixed rate loans will remain the same for that ... Read Answer >>
Trading Center