What it is
Amortization is how a loan gets paid down. Each payment covers that month's interest plus some principal. Early payments are mostly interest. Over time, the principal share grows as the balance shrinks.
Amortization period versus loan term
In commercial real estate, these are usually different numbers, and the difference matters.
- Amortization period is the schedule the payments are calculated on, commonly 25 or 30 years.
- Loan term is when the loan is actually due, commonly 5, 7 or 10 years.
Because the term is shorter than the amortization period, a large balance remains at maturity. That's the balloon payment, and it has to be refinanced or repaid.
Worked example
A $10,000,000 loan at 6.00% with 30-year amortization and a 10-year term:
| Item | Amount |
|---|---|
| Monthly payment | $59,955 |
| Annual debt service | $719,460 |
| Principal paid over 10 years | about $1,630,000 |
| Balloon at year 10 | about $8,370,000 |
The figures are illustrative. Over a decade, the loan pays down roughly 16% of its original balance. The rest comes due at once.
How amortization affects underwriting
- Debt service. Shorter amortization means bigger payments. At 6.00%, the same $10 million loan costs about $719,000 a year on 30-year amortization and about $773,000 on 25-year.
- DSCR. Bigger payments mean lower coverage, which can shrink the loan in loan sizing.
- Refinance risk. More amortization means a smaller balloon and an easier refinance.
Lenders set amortization by asset type and risk. Stabilized multifamily often gets 30 years. Older or riskier assets may get 20 or 25. Interest-only periods delay amortization altogether.
Common mistakes
- Confusing term and amortization. "A 10-year loan" usually doesn't mean it's paid off in ten years.
- Ignoring the balloon. The exit plan has to cover the remaining balance at maturity.
- Comparing quotes with different schedules. A lower rate on 25-year amortization can mean higher payments than a slightly higher rate on 30-year.
In the package
State the requested amortization and show debt service on it. Model the balance at maturity so the lender can see the refinance math. The loan sizing calculator shows how amortization changes maximum proceeds.