Fully Amortizing Payment

Amortizing a loan consists of splitting that repayment into bits. A typical home mortgage works as an example. You borrow $600,000 to buy a house. You get a 30-year mortgage with a fixed rate of 5%. The lender figures out how much interest you’ll owe, adds that to the principal and divides the total by 360 months. Run the math and you end up with a monthly payment of $4,166.67. Same amount every month. When you make your 360th payment, the loan is paid off.

That situation represents a fully amortizing payment. At the end of the loan period, all your regular monthly payments have totaled enough to repay the loan in its entirety.

The alternative to this would be the partially amortizing loan. This structure leaves a balloon payment at the end, an amount that wasn’t included in the monthly payment.

You buy the same $600,000 house as before, but now the mortgage only calls for monthly payments of $3,500, with the balance due at the end of 30 years. So when you make your 360th payment, you still owe a lump sum of $240,000.

That setup represents a partially amortizing loan. Your monthly payments don't completely add up to the total loan amount. Once they're done, you still have some amount left to pay off.