Tap to get financing
Multifamily Loans
Property Types
MultifamilyHealth Care & Senior LivingStudent HousingAffordable HousingMobile Home ParkOffice, Retail & More
Loan Options
Fannie MaeFreddie MacConstruction LoansLoans Under $1MFreddie Mac SBLFHA/HUD Multifamily LoansForeign National LoansCMBSBank LoansLife CompaniesBridge LoansHard MoneySoft MoneyMezzanine FinancingCrowdfundingSBA 504 LoansMezzanine Construction LoansUSDA 538 LoansFix and Flip LoansFractured Condo LoansDSCR LoansRefinance
Resources
BlogLoan DocsForms and TemplatesRatesLingoVideo LibraryMultifamily For SaleCommercial MortgagesFrequently Asked QuestionsBeginner's Guide
Calculators
Multifamily Mortgage CalculatorCap Rate CalculatorNOI CalculatorDSCR CalculatorLTV CalculatorDebt Yield CalculatorCash on Cash Return CalculatorYield Maintenance CalculatorIRR Calculator
About
About UsLeadershipTeamContactAffiliate Program (Coming Soon)We're Hiring
Get financing
Newly Published
Mar 24 at Multifamily Loans
The Best 3 Multifamily Loans for Affordable Housing in 2023
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?
Explore the Janover Network
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
Was This Article Helpful?
Multifamily Finance Blog
Last updated on Feb 19, 2023
5 min read
by Matthew Sloley

What Is Amortization?

Amortization is the process of spreading out a loan into a series of fixed payments over time, where each payment is applied to both the principal of the loan and the interest.

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. Amortization Explained
  2. How Does Amortization Work?
  3. Advantages of Amortization
  4. Disadvantages of Amortization
  5. Related Questions
  6. Get Financing

Image By Towfiqu Barbhuiya From Unsplash.

Amortization Explained

In multifamily lending, you'll often come across the mention of "amortizing loans." Amortization is the process of spreading out a loan into a series of fixed payments over time. Amortization is commonly used in most loan scenarios where the borrower makes periodic installments, such as with a mortgage or a car loan. With an amortizing loan, the borrower repays the loan's principal balance — the original amount they borrowed — plus the interest owed on the loan over time up to the maturity date, leaving no balloon payment.

Amortization is different from simple interest or interest-only loan structures, where the borrower would only repay the interest that accrues on the loan over time, then must cover the remaining principal in one large balloon sum. In most amortization structures, the borrower pays off a little bit of both the principal and the interest each month, gradually chipping away at the loan's balance. The amount of principal and interest included in each payment is determined by the loan's term length and interest rate.

How Does Amortization Work?

With an amortized loan, payments are spread out in equal sums to be paid over the length of the loan term. Each monthly payment is composed of two parts:

Principal: The portion of the payment that goes toward the original amount borrowed

Interest: The portion of the payment that goes toward the cost of borrowing the money

The amount of principal and interest in each payment will be different as the loan matures because the amount of interest to be paid decreases as the principal gets paid down.

To better illustrate how amortization works, here’s a simple example:

A borrower takes out a $100,000 loan with a 4% interest rate. The fixed monthly payment is $1,000. The first payment is broken down to $400 towards interest and $600 towards the principal. The second payment then becomes $398 towards the interest and $602 towards the principal. This process continues — with the amount of interest paid each month decreasing and the amount paid towards the principal increasing — until the loan is paid off, all while keeping the same monthly installment of $1,000.

Image By Towfiqu Barbhuiya From Unsplash.

The interest portion of the payment is higher at the beginning of the loan because the principal has not been paid down by any amount. As payments are made and the principal balance decreases, the interest portion of the payment will decrease as well. Likewise, the amount of principal in each payment will increase as the loan progresses because the debt is slowly being paid off.

To calculate the interest and principal in a multifamily mortgage payment, you can use our mortgage calculator with the attached amortization schedule.

Advantages of Amortization

Amortization has a number of advantages, both for borrowers and lenders alike.

For borrowers, amortization makes it much easier to budget for loan payments. With a fixed payment each month, borrowers know exactly how much they need to set aside to make a payment. This can make managing finances a breeze and keep borrowers current on their loans.

Amortization can also save borrowers money in the long run. With each payment, both the principal and the interest are paid down. This means that the interest portion of your payment will decrease over time, leaving more of your payment to go toward the principal. This actually can save a borrower a significant amount of money over the life of the loan.

For lenders, amortization provides a steady stream of income. With each payment, the borrower will be paying down both the principal and the interest. Amortization allows the lender to receive interest payments throughout the life of the loan.

Amortization can also help lenders manage their risk. With a fixed payment due each month, lenders can be more confident that they will receive their payments on time. This predictability can help lenders plan for their own expenses and manage their own finances.

Disadvantages of Amortization

Even with the range of benefits regarding amortization, it does have some disadvantages for borrowers and for lenders.

For borrowers, the biggest disadvantage is that amortization can make it difficult to pay off a loan early. Amortized loans are carefully calculated to balance the amounts paid towards the loan’s interest and principal over a long term — meaning most amortized loans carry long loan terms. Additionally, in order to make extra payments on the principal of the loan in order to pay it off sooner, a borrower would need to calculate the amount of the payment that will go toward the principal. Without prior knowledge of how each payment is broken down, this can be a complex process.

For lenders, the amortization can result in a loss of income if the borrower prepays the loan. If the borrower makes a large payment on the principal of the loan, the lender will miss out on the interest that would have been earned on that payment.

Amortization can also make it difficult to sell a loan. If a lender needs to sell a loan before it is fully amortized, they may have to sell it at a discount. This is because the buyer will be assuming the remaining interest payments on the loan.

Related Questions

What is the definition of amortization?

Amortization refers to the accounting technique which, in use, periodically lowers the book value of a loan or intangible asset over a period of time towards a set maturity date. When specifically used in the accounting of loan transactions, amortization focuses on how loan payments are spread out over time. In regards to an intangible asset, amortization is not too different from depreciation.

Simply put, amortization refers to debts that are set to be paid off using a fixed repayment schedule. The loan amount is paid in regular installments over a set time period. Amortized loan payments usually consist of a principal amount combined with the interest specified by the loan terms. Payments begin with high interest paid for the first payment, then the interest gradually reduces over time, allowing more contribution toward the principal amount. SBA Express loans are an example of amortized loans.

How does amortization work in commercial real estate financing?

Amortization in commercial real estate financing works by 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.

What are the benefits of amortizing a loan?

Amortization has a number of advantages, both for borrowers and lenders alike.

For borrowers, amortization makes it much easier to budget for loan payments. With a fixed payment each month, borrowers know exactly how much they need to set aside to make a payment. This can make managing finances a breeze and keep borrowers current on their loans.

Amortization can also save borrowers money in the long run. With each payment, both the principal and the interest are paid down. This means that the interest portion of your payment will decrease over time, leaving more of your payment to go toward the principal. This actually can save a borrower a significant amount of money over the life of the loan.

For lenders, amortization provides a steady stream of income. With each payment, the borrower will be paying down both the principal and the interest. Amortization allows the lender to receive interest payments throughout the life of the loan.

Amortization can also help lenders manage their risk. With a fixed payment due each month, lenders can be more confident that they will receive their payments on time. This predictability can help lenders plan for their own expenses and manage their own finances.

Source: www.multifamily.loans/apartment-finance-blog/what-is-amortization

What are the different types of amortization schedules?

The two main types of amortization schedules are fixed-rate and adjustable-rate. Fixed-rate amortization schedules are the most common and involve a fixed interest rate for the entire loan term. This means that the interest rate and monthly payments remain the same throughout the life of the loan. Adjustable-rate amortization schedules, on the other hand, involve an interest rate that can change over time. This type of amortization schedule is typically used for commercial real estate loans, and the interest rate is usually tied to an index such as the LIBOR or Prime Rate. The interest rate and monthly payments can change over time, depending on the index rate.

Source: Apartment.loans

How can amortization be used to reduce the cost of a loan?

Amortization can help reduce the cost of a loan by allowing the borrower to pay down both the principal and the interest over time. With each payment, the interest portion of the payment will decrease, leaving more of the payment to go toward the principal. This can save a borrower a significant amount of money over the life of the loan. For example, according to Multifamily.loans, a borrower with a $1,000,000 loan at a 5% interest rate over a 10-year term would save $50,000 in interest payments by amortizing the loan.

What are the risks associated with amortizing a loan?

The main risk associated with amortizing a loan is that it can make it difficult to pay off the loan early. Amortized loans are carefully calculated to balance the amounts paid towards the loan’s interest and principal over a long term — meaning most amortized loans carry long loan terms. Additionally, in order to make extra payments on the principal of the loan in order to pay it off sooner, a borrower would need to calculate the amount of the payment that will go toward the principal. Without prior knowledge of how each payment is broken down, this can be a complex process.

For lenders, the amortization can result in a loss of income if the borrower prepays the loan. If the borrower makes a large payment on the principal of the loan, the lender will miss out on the interest that would have been earned on that payment.

Amortization can also make it difficult to sell a loan. If a lender needs to sell a loan before it is fully amortized, they may have to sell it at a discount. This is because the buyer will be assuming the remaining interest payments on the loan.

In this article:
  1. Amortization Explained
  2. How Does Amortization Work?
  3. Advantages of Amortization
  4. Disadvantages of Amortization
  5. Related questions
  6. Get Financing

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

Multifamily 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@multifamily.loans

Multifamily Loans

Beginner's Guide
Multifamily Refinance
Multifamily Mortgage Calculator
Current Rates
Commercial Mortgage Calculator

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.