Amortization (AM)
The schedule for repaying loan principal over time through regular payments that include principal and interest.
Definition
Amortization is the repayment of original loan principal according to a set schedule, often called the AM (for example, a 25-year AM). Commercial real estate loans commonly amortize over 15–30 years, with 20–25 year schedules most frequent for small bay acquisitions. The amortization period can be longer than the loan term: a 5-year term with a 25-year AM means payments are sized as if the loan lasts 25 years, with a balloon balance due at year five. Longer amortization lowers monthly debt service and can improve DSCR and cash-on-cash return, while shorter amortization builds equity faster.
Formula
Monthly debt service is sized from loan amount, interest rate, and amortization period; unpaid principal remains as a balloon if the loan term is shorter than the AM.Example
A $1,200,000 loan at 6.5% with a 25-year AM has lower monthly principal-and-interest payments than the same loan on a 20-year AM. If the loan term is 5 years, both still balloon at month 60; only the payment size and remaining balance differ.
See Also
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