Amortization
The schedule that repays a loan's principal over time through regular payments.
Amortization is the process of paying down a loan's principal through scheduled payments over a set period. Each payment covers interest first, then reduces the balance. Early in the schedule most of the payment goes to interest, and the split shifts toward principal over time.
In commercial lending, the amortization period often differs from the loan term. A loan might carry a 25-year amortization but a 10-year term, which sets the payment as if it will be paid off over 25 years while the balance comes due at year 10 as a balloon.
A longer amortization lowers the monthly payment and improves DSCR, which can support more proceeds. The trade-off is more total interest paid over the life of the loan and slower equity build.
Formula
Longer amortization means a lower payment but more total interest
Worked Example
A $2,000,000 loan at 7% costs about $14,100 per month on a 25-year amortization, versus about $17,400 on a 15-year schedule. The longer schedule frees up cash flow but costs more interest overall.
Why It Matters
Amortization sets your payment, which drives DSCR and how much loan a property can carry. Stretching the schedule can rescue a tight deal, but it slows how fast you build equity.
Related Terms
Related Programs and Tools
Frequently Asked Questions
What is the difference between amortization and loan term?
Amortization is the period used to calculate the payment. The term is how long before the balance comes due. A loan can amortize over 25 years but mature in 10.
Does a longer amortization save money?
It lowers the monthly payment but increases total interest paid, since the balance shrinks more slowly. It helps cash flow, not lifetime cost.