The schedule on which a loan's principal is paid down through regular payments. The amortization period sets the payment size and can be longer than the loan's term.
Amortization is the paying down of principal over time. Each payment covers the interest due and retires some principal, and the amortization period is the number of years it would take those payments to bring the balance to zero.
The period and the term are separate numbers. The OCC’s handbook for examiners gives an example: $1,000,000 for a five-year term at 6 percent on a 25-year amortization has a payment of $6,443 a month and leaves about $899,000 owing at maturity. A longer period lowers the payment and raises coverage, but it leaves more owing when the loan comes due.
The same handbook says there is no regulatory maximum, that prudent lenders generally treat 30 years as a reasonable ceiling for income property, and that 15 to 30 years suits most cases: stabilized multifamily at the long end, hotels generally not more than 20 years, and office, retail and industrial around 25. Each lender sets its own policy inside that.
SBA 7(a) loans work differently. They must have a stated maturity, SBA does not allow balloon payments, and a fixed rate loan must fully amortize by maturity.
How it shows up in the data here
Not a field in any public file here. Call reports and credit union filings show balances, never a loan's schedule. HMDA rows carry a loan term in months and a flag for payments that are not fully amortizing, and loan comps prints the median reported term by lender for multifamily loans made. To see a schedule for your own numbers, use the amortization and balloon calculator.
Go further
- Amortization and balloon calculator: Payment, balance over time and the balloon due at maturity.
- Multifamily loan comps: Multifamily loans made, with median reported rate and term by lender.
- Amortization and balloon calculator: Payment, balance at maturity and interest paid, for a loan that amortizes over longer than it runs.
- DSCR calculator: Cash flow over debt service. Type the cash flow and the loan terms, see the ratio and the cushion before it falls to 1.00x.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
- What a lender-ready loan package looks like: A lender decides in minutes whether to keep reading. A package that answers the first five questions on one page, and backs each answer with a document, gets read.
Related terms
- Balloon payment: The lump sum of remaining principal due at the end of a loan's term when the regular payments did not pay the loan off in full.
- Interest-only (IO): A loan, or a stretch of a loan's term, in which payments cover interest alone and the principal balance does not go down.
- Debt service coverage ratio (DSCR): Net operating income, or business cash flow, divided by the loan payments due in a year. It shows how many dollars come in for each dollar of debt service.
- Loan constant: One year of loan payments divided by the loan amount, shown as a percent. It folds the interest rate and the amortization period into a single number.
- Term loan: A business loan for a set amount with a maturity of more than one year, repaid on a fixed schedule from the company's cash flow.
- Fixed rate loan: A loan whose interest rate is set at closing and does not change for a stated period, often the whole term, so the principal and interest payment stays the same.
Sources
- OCC Comptroller's Handbook, Commercial Real Estate Lending, Version 2.0 (Amortization, pp. 40-41, including footnote 48), published .
- SBA SOP 50 10 8.1, Appendix 17, 7(a) Loan Maturity Requirements, and Appendix 18, 7(a) Interest Rate Requirements (Amortization), effective .
- 13 CFR 120.214, conditions for variable interest rates (paragraph (e), amortization), retrieved .
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.