Fully Amortized Loan: A Definition

Whether you’re applying for a mortgage or any other type of financing, it’s a good idea to make sure you understand the model under which these loans are paid off. In this way, you can fully educate yourself before taking on the repayment obligation.

Most loans, including mortgage payments, have both principal and interest paid during the loan term. What differs from one loan to the next is the ratio between the two, which determines the rate at which principal and interest are paid off. In this article, we’ll be discussing fully amortizing loans and contrasting these with other payment structures.

What Is A Fully Amortized Loan?

A fully amortized payment is one where if you make every payment according to the original schedule on your term loan, your loan will be fully paid off by the end of the term.

The word amortization simply refers to the amount of principal and interest paid each month over the course of your loan term. Near the beginning of a loan, the vast majority of your payment goes toward interest. Over the course of your loan term, the scale slowly tips the other way until at the end of the term when nearly your entire payment goes toward paying off the principal, or balance of the loan.

How Do Fully Amortizing Loans Work?

There are differences between the way amortization works on fixed and adjustable rate mortgages (ARMs). On a fixed-rate mortgage, your mortgage payment stays the same throughout the life of the loan with only the mix between the amounts of principal and interest changing each month. The only way your payment changes on a fixed-rate loan is if you have a change in your taxes or homeowner’s insurance. With an ARM, principal and interest amounts change at the end of the loan’s fixed-rate period. Each time the principal and interest adjust, the loan is re-amortized to be paid off at the end of the term.