Amortization is the schedule by which a loan is repaid through level payments that cover interest first and principal second. The amortization period is the number of years that schedule would take to reach zero, and it sets the size of the payment, which is why it moves coverage and cash flow as much as the rate does.
- It is not the loan term. A loan can amortise over thirty years and come due in five, which is the normal shape in commercial lending.
- Shortening the schedule raises the payment and lowers coverage, so it can shrink the loan a property qualifies for without the rate moving.
- The principal inside each payment is real return, invisible in cash flow and counted only when the property is sold or refinanced.
- Interest-only years amortise nothing. The balance that eventually comes due is the balance the loan started with.
The $1,012,000 loan at 6.5% over 30 years, after five years of payments.
Five years and $383,790 of payments retired $64,700 of debt. Early amortisation is mostly interest, and that is the schedule working normally.
Related terms
All termsBalloon Payment
A balloon payment is the unamortised balance that comes due in one sum when a loan reaches the end of its term.
FinanceLoan Maturity
Maturity is the date the loan must be repaid in full, regardless of how the property is performing.
FinanceDSCR (Debt Service Coverage Ratio)
The debt service coverage ratio is net operating income divided by the annual loan payment.
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