What Is a Commercial Loan Amortization, and How Does It Work

You suddenly come across an entirely new language of specialized phrases and words such as commercial loan amortization when you enter the exciting realm of commercial real estate. Even if you are familiar with their precise definitions, you might be surprised to learn that a term used in commercial real estate (CRE) sometimes signifies different things than it does in other property markets. 

In this article, you will understand how to calculate commercial loan amortization, benefits, common types and other important information. Keep on reading to find out. 

What Is Commercial Loan Amortization?

The progressive, step-by-step process of gradually paying off a loan is called amortization. Financing commercial real estate typically entails seeking assistance in the form of a loan because it primarily refers to properties primarily used for business purposes. 

These mortgages secured by liens are the most straightforward option to fund your project, whether you’re looking to buy office space, construct a hotel, or expand a shopping center. Amortization is distributing a debt over a predetermined period into installments that include principal and interest. 

Amortization is crucial since it aids in the understanding and long-term forecasting of costs for organizations and investors. 

Benefits of Commercial Loan Amortization

The following are some of the main benefits of amortization: 

Fixed Loan Payments

The amortization schedule can offer people a straightforward way to keep track of their payments and the current amount of interest owed when they accept a fixed-rate loan. Individuals can organize their payments better and manage their finances as a result.  

Evaluation of Loan Options is Simpler

Amortization makes it simpler to compare different loan options since it may show them how much each loan will cost and the total interest accrued. You can learn which loans offer them the finest payment choice in terms of interest rates and terms. 

Flexible Timeline 

Individuals can use amortization to change their payment timeline based on how much they pay on their loans each month. You can shorten the loan’s repayment period and pay off the debt sooner, perhaps saving money. 

Potential for Equity Growth

The ability to create equity through amortization may depend on the sort of amortization loan a person takes out. For instance, if a person purchases a home using a mortgage with an amortization, they can pay the principal and interest of the loan simultaneously, enabling them to create equity more effectively. As a result, you can leverage the value of your house more rapidly for things like cash-out refinancing or home equity loans. 

Common Types of Amortization 

A loan’s amortization table or schedule can be made by the lender using various amortization methods. Although there are different ways to amortize commercial and corporate loans, a few different types of amortization apply to consumer loans. 

Full Amortization at a Fixed Rate

A loan that will be entirely repaid at the close of the amortization period has been fully amortized. You will make equal payments over the loan if the interest rate is fixed, though the final payment may be larger or smaller based on the amount still owed. 

Partial Amortization with a Balloon Payment 

Some partial amortization loans also have a balloon payment after the first period of deferral or interest-only payments. Before the Great Recession, balloon payments were more prevalent with consumer mortgages and might still be an option for some borrowers. A balloon payment is more than twice the loan’s monthly payment and is frequently in the tens of thousands of dollars. 

Negative Amortization 

It is negative amortization when your payment falls short of the interest owed. Due to this, even if you make your full payment before the due date, your overall debt could still go up. The unpaid interest is often added to your loan’s principal, increasing your interest expense for the next period. 

How to Calculate Your Commercial Loan Amortization Schedule

Once the loan’s amortization has been calculated, a schedule is made that outlines the precise distribution of each loan payment. An amortized loan’s monthly principal payment is determined using the following formula: 

Principal Payment = TMP − (OLB × 12 Months / Interest Rate) 

Where: 

TMP is the total monthly payment. 

OLB is the outstanding loan balance. 

Total Payment = Loan Amount × [(1+i) n−1i×(1+i) n ] 

Where: 

i is the monthly interest payment. 

n is the number of payments . 

Calculation 

Here is a detailed procedure for calculating amortization: 

• Calculate the first month’s interest and principal amount.  
• Collect all the data you’ll need to calculate the loan’s amortization 
• Calculate the interest on the monthly payment for one month 
• Calculate the principal amount for one month 

• Use the new principal amount at the end of the first month to calculate amortization for the second month.  
• Calculate the second month’s principal repayment 
• Next, calculate the amortization for the whole loan duration.  

You can also use Finance Lobby’s online loan amortization calculator to skip the challenging mathematical work. 

Tips for Reducing the Amount of Interest You Pay on Your Loans

Even if there are additional fees involved, you might be surprised by how much you can save on the cost of your loan by moving it or paying it off.

Shorter Loan Period

Most borrowers believe they will always need help to change the loan terms. However, if your credit history is good, you might ask your lender to modify the loan terms. You can reduce your debt sooner by taking out loans for a shorter time and paying greater EMIs. In addition, you wind up paying less interest if the loan period is shorter. 

Make Part-payments

Your loan might be significantly reduced with part payment. Therefore, it is advised to make loan partial payments anytime you have extra money, such as a bonus, present, or any other unexpected income, rather than blowing it all on excesses. Although some lenders charge after a set amount or number of part payments, some do not. You should first examine the prepayment fees with your lender. 

Opt for Debt Consolidation

Debt consolidation is taking out a fresh loan to pay off your current debts on better terms, such as a lower interest rate or a more extended loan period. It aids in debt management and lessens your financial stress. Consolidating all your loans will enable you to save on interest fees, speeding up loan repayment. 

What Is a Fully Amortized Loan?

A fully amortized loan is one in which, provided you make all of your payments according to the initial plan on your loan agreement, you will have completely paid off your loan at the end of the term.  

A fully amortizing loan often has an initial payment where interest is paid a greater percentage than the principal. The principal and interest payments will be equal around the middle of the loan’s term. Going into the back half of the loan, more of the payment goes to the principal. The paydown is hastened during the second half of the loan since more of the payment is going to the principal. 

Examples of Loan Amortization

Consider the $50,000 loan that is still due to you. If you pay $10,000 in principal each year, $10,000 of the loan has been amortized. You must also include $10,000 as an amortization charge in your records annually. 

Suppose you have a loan for $18,000 over two years with a 5% interest rate. The loan has a monthly payment schedule. The following is the loan amortization schedule: 

Based on the given amortization schedule, the borrower would be obligated to pay $789.69 monthly. The first month’s interest is $75, and it gradually reduces over the course of the loan. Over the loan’s duration, the borrower will pay interest of a total of $952.40. 

Can You Pay off a Fully Amortized Loan Early?

If your lender permits it, then yes. Early repayment of a fully amortized loan may save money on interest. However, if you choose to pay off a loan early, be aware that your lender can impose a prepayment penalty to compensate for any lost interest. 

Frequently Asked Questions on Commercial Loan Amortization

What Loan Types Are Amortized?

Any loan that includes interest and principal in each payment is amortized, and several different forms of loans operate in this manner. 

What Is the Difference Between Unamortized and Amortized Loans?

Unamortized loans typically require the borrower to make interest-only payments for most of the loan’s term before making a balloon payment to pay off the loans. Unamortized loans do let borrowers pay less because they are interest-only loans. 

Is an Amortized Loan an Installment Loan?

Yes, however, not every Installment Loan is an Amortized Loan. Interest payments may be made when the principal is not paid on an installment loan. It could result in a more extended loan repayment period and unequally sized installments, some of which may be too large for most budgets.

Conclusion

By breaking down loan repayments into a series of set payments based on a predetermined repayment date, commercial loan amortization gives borrowers and lenders an efficient way to comprehend how payments are applied.  

To guarantee that the loan is paid off after the loan amortization schedule, a portion of each periodic payment is applied to the interest charges and another to the loan balance. 

Finance Lobby is the leading marketplace for commercial real estate financing. We are transforming the CRE financing industry by making it easier for brokers and lenders to find the best deals on which they can close quickly.