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Amortization is the process of paying down a loan's principal balance through scheduled payments over a defined period. In commercial real estate, the amortization schedule determines how each monthly payment splits between principal and interest, and it directly affects the borrower's debt service, DSCR, and overall deal economics. Most CRE loans use 25-year or 30-year amortization schedules, even when the loan term itself is only five to ten years — meaning a balloon payment is due at maturity for the remaining balance.
Amortization Definition
At its core, amortization is math. Each payment on an amortizing loan covers two things: a portion of the interest owed and a portion of the principal balance. Early in the schedule, most of the payment goes toward interest. Over time, the interest share decreases and the principal share increases. This is because interest is calculated on the remaining balance, which gets smaller with each payment.
The amortization period is not the same as the loan term. In CRE, the amortization period is almost always longer than the term. A loan with a 10-year term and 30-year amortization means the borrower makes payments as if paying off the loan over 30 years, but the remaining balance comes due after 10 years. That remaining balance is the balloon payment.
The Amortization Formula
Where:
- P = principal loan amount
- r = monthly interest rate (annual rate divided by 12)
- n = total number of payments (amortization period in months)
Worked Example
A borrower takes a $5 million loan at a 6.5% annual interest rate with a 30-year amortization schedule.
- P = $5,000,000
- r = 0.065 / 12 = 0.005417
- n = 360 months (30 years × 12)
Annual debt service: $31,601 × 12 = $379,212. If the property generates $490,000 in NOI, the DSCR is $490,000 / $379,212 = 1.29x.
Now compare with a 25-year amortization on the same loan: the monthly payment rises to approximately $33,820, pushing annual debt service to $405,840 and dropping the DSCR to 1.21x. Same property, same rate, same loan amount — but the amortization schedule changes whether the deal meets a 1.25x DSCR threshold.
Use the DSCR calculator or commercial mortgage calculator to model these scenarios instantly.
Why Amortization Matters for Brokers
Amortization is one of the most effective levers brokers have for structuring deals. Unlike the interest rate, which is largely determined by market conditions and borrower credit, the amortization schedule is often negotiable within a lender's program parameters.
When a deal's DSCR is tight, requesting a longer amortization can bring it above the lender's minimum without changing the loan amount or rate. When presenting multiple term sheets to a borrower, showing how different amortization schedules affect monthly payments helps the borrower make an informed decision. For guidance on structuring deal packages, see our dedicated guide.
Amortization by Loan Type
| Loan Type | Typical Amortization | Notes |
|---|---|---|
| CMBS | 30 years | Standard; interest-only periods available on some deals |
| Bank | 20–30 years | Varies by lender and property type; some banks prefer 25 years |
| Fannie Mae / Freddie Mac | 30 years | Standard for multifamily; IO periods available |
| Life Company | 25–30 years | Conservative structures may use shorter amortization |
| SBA 504 | 20–25 years | Real estate component typically 25 years |
| Bridge / Debt Fund | Interest-only | Most bridge loans are IO during the term |
Interest-Only vs. Amortizing Payments
Many CRE loans offer an initial interest-only period before amortization begins. During the IO period, the borrower pays only interest, which reduces debt service and improves DSCR. The principal balance does not decrease during IO.
IO periods are common on CMBS loans, agency loans for well-qualified borrowers, and bridge loans (which are often fully IO). The trade-off: when amortization kicks in after the IO period, monthly payments increase, sometimes significantly. Borrowers and brokers need to underwrite the post-IO payment, not just the IO payment, to confirm the property can sustain the higher debt service.
How Amortization Affects Loan Sizing
Lenders size loans based on multiple constraints, and amortization is baked into one of the most important: DSCR. When a lender requires a minimum 1.25x DSCR, they calculate the maximum annual debt service the property can support (NOI / 1.25), then work backward to determine the loan amount based on the interest rate and amortization schedule.
A longer amortization means lower annual debt service for any given loan amount, which means the lender can offer a larger loan while still meeting the DSCR threshold. This is why amortization is a lever — extending it from 25 years to 30 years can increase the maximum loan amount by 5% to 10%, depending on the rate.
This content is for informational and educational purposes only and does not constitute financial, legal, tax, or investment advice. JPro Labs LLC is a technology platform that connects commercial mortgage brokers with lenders. JPro Labs LLC is not a lender and does not make lending decisions. Loan terms, rates, eligibility, and availability are determined by individual lenders and are subject to change without notice. Consult qualified financial and legal professionals before making financing decisions.
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Try Janover Pro →This content is for informational and educational purposes only and does not constitute financial, legal, tax, or investment advice. Janover Pro is a technology platform that connects commercial mortgage brokers with lenders. Janover Pro is not a lender and does not make lending decisions. Loan terms, rates, eligibility, and availability are determined by individual lenders and are subject to change without notice. Consult qualified financial and legal professionals before making financing decisions.
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