what is a fully amortizing payment 
a fully amortizing payment refers to a type of periodic repayment on a debt if the borrower makes payments according to the loan s amortization schedule the debt 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 understanding a fully amortizing paymentloans for which fully amortizing payments are made are known as self amortizing loans mortgages are typical self amortizing loans and they usually carry fully amortizing payments homebuyers can see how much they can expect to pay in interest over the life of the loan using an amortization schedule provided by their lender an interest only payment is the opposite of a fully amortizing payment if our borrower is only covering the interest on each payment they are not on the schedule to pay the loan off by the end of its term if a loan allows the borrower to make initial payments that are less than the fully amortizing payment then the fully amortizing payments later in the life of the loan are significantly higher this is typical of many adjustable rate mortgages arms 1to 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 they would pay 1 266 71 as indicated in the first example and that amount would 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 making 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 if you have an interest only adjustable rate mortgage arm refinancing it before the rate adjusts could help to avoid a significant jump in monthly payments fully amortized loan payment exampleto illustrate a fully amortizing payment imagine a man takes out a 250 000 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 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 they pay off the loan by the end of its term here s how the loan amortization schedule would look for years one through five of the loan now here s what the amortization schedule looks like for the last five years of the loan as you can see more of the borrower s monthly payments go toward the principal on the loan as the end of the mortgage term approaches your amortization schedule for a mortgage may also break down what goes toward homeowners insurance or property taxes if those are escrowed into your loan payments pros and cons of fully amortized loansthe main advantage of fully amortized loans is the ability to see how your payment is divided up each month on a mortgage or similar loan this can make planning your budget easier because you ll always know what your mortgage payments will be assuming you choose a fixed rate loan option the chief disadvantage of fully amortized loans is that they require you to pay the lion s share of interest charges up front going back to the fully amortized loan example offered previously you can see that the majority of what the borrower pays in the first five years of the loan goes toward interest if they were to sell the home after five years then they may have made only a very small dent in the loan balance if the home hasn t increased significantly in value they may have very little equity to show for their efforts making a sale of the home less profitable the lender is a winner however because they ve been able to collect those interest payments in the preceding five years if you have a mortgage and you re thinking of refinancing using an online calculator to find your breakeven point with a fully amortizing loan can help you decide if it s the right move other types of loan paymentsin 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 they receive 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 they must pay at least the minimum however if they want to stay on track to have the loan paid off in 15 or 30 years they must make the corresponding fully amortizing payment 2making minimum payments could result in a larger loan balance if you re not making a dent in what you owe toward the interest faqs