| Detail | Explanation |
|---|---|
| Sets | The monthly payment and how fast principal declines |
| Term vs amortization | The term sets the due date, amortization sets the payment |
| Early payments | Mostly interest |
| Result at maturity | A balloon balance when amortization exceeds the term |
How does an amortization schedule work?
Each payment is the same, but its split changes over time. Interest is charged on the outstanding balance, so early payments are mostly interest and a small amount of principal. As the balance falls, interest shrinks and more of each payment reduces principal.
Commercial loans often pair a 5, 7, or 10 year term with a longer amortization. Freddie Mac's term sheet for Optigo fixed-rate multifamily loans, for example, lists 5 to 10 year terms for securitized loans and a maximum amortization of 30 years. Many lenders also accrue interest on an actual/360 basis, which charges slightly more interest over a year than the standard formula assumes.
Monthly payment = loan amount x r / (1 - (1 + r)^-n), where r is the annual rate divided by 12 and n is the amortization in months
Worked example
In this hypothetical example, a $5,000,000 loan at 7.00% amortizes over 30 years with a 10-year term. The monthly payment is $33,265. In month 1, $29,167 of that is interest and about $4,098 is principal. The table tracks the balance.
| End of year | Principal repaid to date | Remaining balance |
|---|---|---|
| 1 | $50,790 | $4,949,210 |
| 5 | $293,421 | $4,706,579 |
| 10 | $709,381 | $4,290,619 |
Shorter amortization, higher payment
On a 25-year schedule, the same hypothetical loan costs $35,339 a month, or $424,068 a year against $399,181 on the 30-year schedule. After 10 years the balance is $3,931,670, so the owner has repaid $1,068,330 of principal instead of $709,381.
The faster paydown lowers refinance risk, but the higher payment reduces DSCR. When coverage is tight, a lender may size a smaller loan on the shorter schedule. The commercial mortgage calculator shows payment, annual debt service, and balance at maturity for any combination.
What determines the amortization a lender offers
If you are weighing amortization against proceeds on a permanent loan, send Capital Partners the deal to compare lender structures.
- Property type and the expected useful life of the improvements
- Loan program, since agency, CMBS, life company, bank, and SBA loans each follow their own guidelines
- Leverage and coverage, with lower-leverage loans more likely to receive longer schedules or interest-only periods
- Lease term and tenant credit on single-tenant property
- Loan purpose, since bridge and construction loans are usually interest only
Sources
Common questions
What is the difference between loan term and amortization?
The term is when the loan comes due. Amortization is the schedule used to calculate the payment. A 10-year term with a 30-year amortization leaves a large balloon payment at year 10.
Is a longer amortization better?
It lowers the payment and improves coverage, which can increase proceeds. The tradeoff is slower principal paydown and a larger balance to refinance at maturity.
Do commercial loans amortize over 30 years?
Many do, especially multifamily and stabilized income property. Freddie Mac's fixed-rate multifamily term sheet lists 30 years as its maximum amortization. Other property types and lenders often use 20 or 25 years.
Can I pay extra principal on a commercial loan?
Only if the loan documents allow it. Many fixed-rate commercial loans restrict prepayment or charge a prepayment penalty, which can apply to partial paydowns.
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