Amortization is the repayment of a loan’s principal balance through scheduled periodic payments over the life of the loan. Each payment covers interest plus a portion of principal, and the split shifts over time: early payments are interest-heavy, later payments retire more principal. In CRE lending, amortization schedules typically run 25 to 30 years while loan terms are far shorter.
How is an amortizing payment calculated?
Payment = Balance x r / (1 - (1 + r)^-n), where r is the periodic interest rate and n is the number of payments in the schedule
The interest portion of each payment is the outstanding balance times the periodic rate; the remainder of the payment reduces principal. Because the balance falls with every payment, the interest portion shrinks and the principal portion grows, even though the payment itself stays level.
Illustrative example: a $10,000,000 loan at a 6.0% fixed rate, monthly payments, 10-year term.
| Amortization schedule | Monthly payment | Annual debt service | Balance owed at year 10 |
|---|---|---|---|
| 25-year | $64,430 | $773,200 | $7,635,000 |
| 30-year | $59,955 | $719,500 | $8,369,000 |
Why does the amortization schedule matter for DSCR?
The schedule sets monthly debt service and therefore the debt service coverage ratio. A 30-year schedule produces lower payments than a 25-year schedule on the same balance, which can be the difference between passing and failing a DSCR covenant test. In the example, $900,000 of NOI covers the 30-year payment at 1.25x but the 25-year payment at only 1.16x.
Borrowers often negotiate longer amortization schedules for exactly this reason. Lenders, in turn, run hypothetical amortization tests that measure coverage against a schedule of their own choosing rather than the one in the note.
What is a balloon payment?
The loan’s term, often 5, 7 or 10 years, is usually much shorter than its amortization schedule. That mismatch means the borrower owes a balloon payment at maturity equal to the remaining unpaid principal. Longer amortization means less paydown during the term, a larger balloon and higher refinancing risk: in the example, the 30-year schedule leaves roughly $734,000 more outstanding at year 10 than the 25-year schedule.
The interplay between amortization schedule, interest-only periods and loan term shapes the entire cash flow profile of the debt. An IO period defers amortization entirely; when it ends, payments step up to the amortizing amount and DSCR falls on that date.
How amortization shows up in LoanBoss
LoanBoss models each amortization type, including mortgage style, straight line, step-up, step-down, fixed payment, interest-only periods and fully custom schedules. Agency floaters are re-amortized automatically each month based on the floating reset for that period, and the platform tracks projected paydown and balloon exposure at maturity across the portfolio.
Frequently Asked Questions
What is the difference between amortization and loan term?
The amortization schedule is the period over which payments are sized to retire the balance, typically 25 to 30 years. The term is when the loan actually comes due, often 5, 7 or 10 years. The unpaid balance at the end of the term is the balloon.
Is a 30-year or 25-year amortization better for a borrower?
A 30-year schedule lowers debt service and raises DSCR, which helps covenant tests and cash flow. A 25-year schedule pays down more principal and leaves a smaller balloon at maturity. Borrowers usually negotiate the longer schedule for the coverage benefit.
Why are early payments mostly interest?
Interest is charged on the outstanding balance, which is largest at the start of the loan. As principal is repaid, the interest portion shrinks and more of each level payment goes to principal.
What happens to amortization after an interest-only period?
No principal is repaid during the IO period. When it ends, payments reset to the amortizing amount based on the remaining schedule, so debt service rises and DSCR falls on that date.
How does amortization work on a floating-rate loan?
Each time the index resets, the payment is recalculated on the new rate so the balance still retires over the remaining schedule. Agency floaters are re-amortized monthly on the floating reset for that period.
Related Terms
- Debt Service Coverage Ratio
- Interest-Only
- Maturity Date
- Floating Rate
- Balloon Payment
- Interest-Only Expiry: Planning for the Amortization Cliff Across Your Portfolio
- Floating-Rate Loan Re-Amortization and SOFR Index Tracking for Borrowers
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.
Sources
- LoanBoss CRE Debt Glossary