Amortization is the process of repaying a loan’s principal balance through scheduled periodic payments over the life of the loan. Each payment consists of both principal and interest, with the proportion shifting over time — early payments are interest-heavy, while later payments retire more principal. In CRE lending, amortization schedules typically range from 25 to 30 years, though the loan’s actual term (maturity) is usually much shorter — often 5, 7, or 10 years. This mismatch between the amortization schedule and the loan term means the borrower will owe a balloon payment at maturity representing the remaining unpaid principal.
How It Works in Practice
In a typical CRE loan, the amortization schedule directly affects your monthly debt service and, consequently, your debt service coverage ratio (DSCR). A 30-year amortization schedule produces lower monthly payments than a 25-year schedule on the same loan balance, which can be the difference between passing and failing a DSCR covenant test. Borrowers often negotiate longer amortization schedules precisely for this reason. However, longer amortization means less principal paydown during the loan term, resulting in a larger balloon payment at maturity and higher refinancing risk. When structuring a loan, the interplay between amortization schedule, interest-only periods, and the loan term shapes the entire cash flow profile of the debt. LoanBoss tracks amortization schedules across your portfolio so you always know your projected paydown and balloon exposure at maturity.
Related Terms
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.