Tap to get financing
Commercial Real Estate Loans
Loan Options
Permanent FinancingLoans Under $1MBridge LoansMezzanine FinancingConstruction LoansUSDA 538 Loan ProgramLife Company LoansSBA 7(a) LoansSBA 504 Loan ProgramFannie Mae LoansFreddie Mac LoansCMBS LoansHUD Multifamily LoansFix and Flip LoansHUD 223(f) LoansHUD 221(d)(4) LoansHUD 223(a)(7) LoansHUD 241(a) LoansHUD 232 LoansHUD 232/223(f) LoansHUD 232 LEAN LoansHUD 232/223(a)(7) Loans
Property Types
All Property TypesRetailOfficeIndustrialApartmentsSelf StorageHotelLandChurchSchoolAuto DealershipAuto Repair ShopCar WashGas StationHealthcareMedical OfficeDental OfficeVeterinaryFitness CenterBowling AlleyConvenience StoreDay Care CenterGolf CourseAnchored Strip CenterRestaurantMarinaWarehouseFuneral Home
Resources
BlogCurrent Mortgage RatesForms and TemplatesCommercial Property for SaleCommercial MLS GuideGlossaryVideo LibraryApply OnlineHow to Get a CRE LoanFrequently Asked Questions
Calculators
Commercial Mortgage CalculatorCap Rate CalculatorNOI CalculatorDSCR CalculatorLTV CalculatorLTC CalculatorDebt Yield CalculatorYield Maintenance CalculatorInternal Rate of Return Calculator
About Us
About UsLeadershipTeamContactWe're Hiring
Get financing
Newly Published
Mar 17 at Commercial Real Estate Loans
Top 10 Commercial Real Estate Lenders of 2023
Mar 15 at Commercial Real Estate Loans
Top 4 Refinancing Loans for Industrial Real Estate in 2023
Feb 20 at Commercial Real Estate Loans
How to Set Rent Rates for Your Commercial Property in 2023
Explore the Janover Network
Mar 20 at Multifamily Loans
Multifamily Minute Reader Reflections: How Will Bank Failures Impact Multifamily?
Mar 14 at Multifamily Loans
Multifamily Minute Reader Reflections: How Big Are We Buying?
Feb 27 at Multifamily Loans
Multifamily Minute Reader Reflections: When Do You Start the Refi Process?
Was This Article Helpful?
Commercial Real Estate Glossary
Last updated on Feb 19, 2023
2 min read

Amortization in Commercial Real Estate

Amortization is the process of spreading a loan into payments that consist of both principal and interest over a set timeline, called an amortization schedule.

Better Financing Starts with More Options Start Your Application and Unlock the Power of Choice. Click Here to Get Quotes →$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get Quotes
In this article:
  1. What is Amortization in Commercial Real Estate? 
  2. Principal and Interest in Amortized Loans 
  3. Balloon Loans in Commercial Real Estate 
  4. Negatively Amortizing Loans Can Be Particularly Risky For Borrowers 
  5. Questions? Fill out the form below to speak with a commercial real estate loan specialist.
  6. Related Questions
  7. Get Financing

What is Amortization in Commercial Real Estate? 

Amortization is the process of spreading a loan into payments that consist of both principal and interest over a set timeline, called an amortization schedule. While some commercial real estate loans are fully amortizing, not all are. For example, balloon loans are typically only partially amortizing. In addition, interest-only loans (like many commercial construction loans) usually have a non-amortizing interest-only period, followed by a period that is either partially or fully amortizing.

Principal and Interest in Amortized Loans 

In an amortized loan, the amount of interest a borrower pays decreases as they pay off the principal. This is because the amount of interest charged is based upon the most recent principal balance of the loan. As a borrower continues to pay off their loan, the proportion of the payment that goes to interest decreases, while the proportion that goes to paying off the principal increases. 

Balloon Loans in Commercial Real Estate 

While many residential real estate loans are fully amortizing, most commercial real estate loans are not. For example, a loan might have a term of 7 years and an amortization period of 30. That means that, while the borrower makes payments as if the loan was due in 30 years (over a 30-year amortization schedule), the full principal balance of the loan is due in 7 years. In many cases, commercial real estate borrowers refinance the loan at this point instead of making a large balloon payment. 

Negatively Amortizing Loans Can Be Particularly Risky For Borrowers 

In some cases, loans may be negatively amortizing. In this case, a borrower isn't even fully paying the interest on the loan. Negatively amortizing loans can be particularly risky for borrowers, since each time a borrower doesn't fully pay off a month's interest, that unpaid interest is added to the principal of the loan. The next month, the borrower is required to make a larger interest payment on the new, increased principal. In this case, compound interest actually works against them. In the long run, this can become extremely expensive.  

Questions? Fill out the form below to speak with a commercial real estate loan specialist.

Related Questions

What is amortization in commercial real estate?

Amortization is the process of spreading a loan into payments that consist of both principal and interest over a set timeline, called an amortization schedule. While some commercial real estate loans are fully amortizing, not all are. For example, balloon loans are typically only partially amortizing. In addition, interest-only loans (like many commercial construction loans) usually have a non-amortizing interest-only period, followed by a period that is either partially or fully amortizing.

How does amortization affect a commercial real estate loan?

Amortization affects a commercial real estate loan by reducing the amount of interest a borrower pays as they pay off the principal. In an amortized loan, the amount of interest a borrower pays decreases as they pay off the principal. This is because the amount of interest charged is based upon the most recent principal balance of the loan. As a borrower continues to pay off their loan, the proportion of the payment that goes to interest decreases, while the proportion that goes to paying off the principal increases.

However, many commercial real estate loans are not fully amortizing. For example, a loan might have a term of 7 years and an amortization period of 30. That means that, while the borrower makes payments as if the loan was due in 30 years (over a 30-year amortization schedule), the full principal balance of the loan is due in 7 years. In many cases, commercial real estate borrowers refinance the loan at this point instead of making a large balloon payment.

What are the benefits of amortizing a commercial real estate loan?

The main benefit of a traditional amortizing loan is that your monthly payments will remain consistent throughout the life of the loan. This can make budgeting and cash flow planning much easier. Another benefit is that, because you're paying down the principal balance over time, you'll eventually build up equity in the property. This can be beneficial when you refinance or sell the property.

For more information, please see The Benefits and Risks of Interest-Only Loans in Commercial Real Estate and Amortization in Commercial Real Estate.

What are the drawbacks of amortizing a commercial real estate loan?

The main drawback of amortizing a commercial real estate loan is that the loan may be negatively amortizing. In this case, a borrower isn't even fully paying the interest on the loan. Negatively amortizing loans can be particularly risky for borrowers, since each time a borrower doesn't fully pay off a month's interest, that unpaid interest is added to the principal of the loan. The next month, the borrower is required to make a larger interest payment on the new, increased principal. In this case, compound interest actually works against them. In the long run, this can become extremely expensive.

Another drawback of amortizing a commercial real estate loan is that the loan may have a balloon payment. For example, a loan might have a term of 7 years and an amortization period of 30. That means that, while the borrower makes payments as if the loan was due in 30 years (over a 30-year amortization schedule), the full principal balance of the loan is due in 7 years. In many cases, commercial real estate borrowers refinance the loan at this point instead of making a large balloon payment.

How can I calculate the amortization of a commercial real estate loan?

You can calculate the amortization of a commercial real estate loan using our Commercial Mortgage Calculator. This calculator will help you determine the estimated principal, interest, and amortization for any given loan amount and rate. The principal is the amount of money you are borrowing from the lender. The loan term is the duration of time that you have to pay off the principal and interest of the loan. Loan terms for commercial properties are usually about 15-30 years. The length of the loan term affects the size of your monthly installments, as well as how much you would have paid off at the end of the loan (your balloon payment).

Commonly associated with amortized loans are balloon payments. Balloon payments involve the borrower paying off the principal with decreasing interest amounts, leaving a large (balloon) payment of mostly principal towards the end of the loan term. Balloon payments should always be planned for, as they can deal quite a blow to your finances if not budgeted for.

Through Commercial Real Estate Loans, you can be confident that we will provide you access to the industry’s best loan rates no matter the property type, location or size!

In this article:
  1. What is Amortization in Commercial Real Estate? 
  2. Principal and Interest in Amortized Loans 
  3. Balloon Loans in Commercial Real Estate 
  4. Negatively Amortizing Loans Can Be Particularly Risky For Borrowers 
  5. Questions? Fill out the form below to speak with a commercial real estate loan specialist.
  6. Related questions
  7. Get Financing
Categories
  • Commercial Property Loans
  • CRE Loans
Tags
  • Commercial Mortgage
  • commercial real estate loans
  • Commercial Property Loans
  • Amortization
  • Amortizing Loans

Getting commercial property financing should be easy.⁠ Now it is.

Click below for a free, no obligation quote and to learn more about your loan options.

Get financing →
Janover logo

Commercial Real Estate Loans is a Janover company. Please visit some of our family of sites at: Multifamily Loans, Multifamily Today, Commercial Real Estate Loans, SBA7a Loans, CMBS Loans, Apartment Loans, HUD Loans, HUD 221d4 Loan, HUD 232 Loan, HUD 223f Loan, HUD 223a7 Loan, SBA Express Loans, SBA 504 Loans, and OpportunityZones Help.

Janover Inc.

6401 Congress Ave
Ste 250
Boca Raton FL 33487

hello@commercialrealestate.loans

Commercial Real Estate Loans

Eligible Property Types
Mortgage Rates
Commercial Loan Calculator
Glossary

Site Information

Privacy Policy
Terms of Use

This website is owned by a private company that offers business advice, information and other services related to multifamily, commercial real estate, and business financing. We have no affiliation with any government agency and are not a lender. We are a technology company that uses software and experience to bring lenders and borrowers together. By using this website, you agree to our use of cookies, our Terms of Use and our Privacy Policy. We use cookies to provide you with a great experience and to help our website run effectively.

Freddie Mac® and Optigo® are registered trademarks of Freddie Mac. Fannie Mae® is a registered trademark of Fannie Mae. We are not affiliated with the Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA), Freddie Mac or Fannie Mae.

Copyright © 2022 Janover Inc. All rights reserved.