Background

Dollar Roll and True Amortization belong to different corners of finance. A Dollar Roll is a securities-market technique used mainly by institutional investors and dealers in the mortgage-backed securities (MBS) market; True Amortization is a lending concept used in consumer and commercial loans to schedule principal and interest repayments. In my practice advising lenders and borrowers, I’ve seen each method used for distinct goals—liquidity management versus predictable payoff planning.

How each method works

  • Dollar Roll: A Dollar Roll involves selling an MBS for settlement, agreeing to buy a substantially similar MBS at a later date (often the next month). The seller receives cash now and accepts a price difference when the security is repurchased; effectively it functions like a short-term, repo-style financing in the MBS market. This can free up cash for other investments but exposes the party to market and delivery risk (source: Investopedia).

  • True Amortization: True Amortization means loan payments include both interest and principal so the outstanding balance steadily declines and reaches zero by loan maturity. Common amortization patterns include level-payment (equal payment) schedules where interest portion falls and principal portion rises over time. This is the standard for most residential mortgages and many installment loans.

Key differences at a glance

Feature Dollar Roll True Amortization
Primary use Short-term liquidity / trading Systematic loan repayment
Typical users Institutional investors, MBS dealers Homebuyers, businesses, consumer borrowers
Risk focus Market/delivery and basis risk Credit and interest-rate risk over loan life
Cash-flow effect Provides immediate cash; repurchase obligation later Predictable periodic outflows that reduce principal

When each method makes sense

  • Use Dollar Rolls when you need short-term funding or temporary balance-sheet relief in MBS positions and you understand basis and delivery risks (institutional context).
  • Use True Amortization when you want a clear payoff path, easier budgeting, and predictable interest allocation—for example, most owner-occupied mortgages or amortizing business loans.

Real-world examples

  • Dollar Roll: An MBS trader sells securities in a dollar roll to raise cash today, planning to repurchase substantially similar securities next month—gaining temporary liquidity while avoiding full sale costs (Investopedia).
  • True Amortization: A 30-year fixed-rate mortgage where each monthly payment includes interest and principal so the loan balance decreases steadily until paid off.

Who is affected

Dollar Rolls are primarily relevant to institutional and professional market participants active in MBS trading. True Amortization affects consumer and commercial borrowers who want loans that amortize to zero—typical mortgage and installment loan customers.

Practical tips (professional perspective)

  1. Match tool to goal: don’t use dollar-roll-style financing unless you trade MBS or have institutional access; it’s not a consumer loan feature.
  2. Run scenarios: for amortizing loans, project amortization schedules to see interest vs principal over time—this clarifies tax and cash-flow impacts. See our guide on Loan Amortization Schedules for examples.
  3. Consider prepayment and extra-payment effects: making extra principal payments accelerates true amortization—learn more in our article on How Loan Amortization Changes with Extra Principal Payments.
  4. Ask about hidden costs: Dollar Rolls may look cheap but factor in transaction, delivery and market basis risks.

Common mistakes and misconceptions

  • Treating Dollar Roll like a consumer loan feature: it’s a market financing trade, not a mortgage repayment structure.
  • Assuming amortization removes interest risk: amortizing loans reduce principal exposure over time but don’t eliminate interest-rate risk for adjustable-rate loans.

Frequently asked questions

Q: Can a borrower “switch” from a Dollar Roll to True Amortization?
A: They aren’t interchangeable. Dollar Rolls are securities-market financing; True Amortization is a loan repayment design. A borrower would instead refinance or restructure an actual loan to move from interest-only or bullet repayment to an amortizing schedule.

Q: Does True Amortization always mean equal payments?
A: Not always. True amortization means principal is repaid over time; payments can be level (equal) or graduated, depending on loan terms.

Professional disclaimer

This entry is educational and not personalized financial advice. Consult a qualified financial advisor or your lender before making decisions involving securities financing or loan restructuring.

Authoritative sources

Internal resources

Note: Facts and market practices are current as of 2025; rules and market terms can change.