CRE Loans: Understanding Loan Term vs Amortization (2024)

In commercial real estate, everything from the sale to the mortgage tends to be more complex than in the residential market. Often, in meeting a borrower’s unique needs, these loans offer additional nuances and options.

What is the difference between loan term and amortization? What is the amortization period of a loan? The loan’s amortization period and term for commercial real estate mortgages can be confused for one another but are just some of the unique options integrated within the sale.

In this article, we’ll take a closer look at loan term vs amortization to gain a better understanding of both and, ultimately, commercial real estate mortgages as a whole.

Understanding Loan Terms

The period of time the borrower must repay the loan’s principal balance is known as its term. Generally, most commercial real estate loans tend to range from 5-10 years, although they can range up to a longer term of 30 years.

Typically, the 5-10 year length of time is enough for borrowers to execute their business plan for the property while providing lenders with a relatively short-term commitment.

What Determines a Loan Term?

The loan term can vary dramatically depending on the situation but is primarily influenced by two significant factors in the sale.

The Bank’s Willingness to Commit

The lender might or might not be willing to take on a loan transaction commitment for the long term depending on the banking institution’s view of movements in interest rates and macroeconomic conditions. Because of this, the duration of the commitment the bank is willing to partake in the transaction is often a significant consideration in the loan term.

The Specific Needs of the Sale

The transaction’s specific needs will vary from borrower to borrower, impacting the loan term. For example, the loan may have a shorter duration than one intended to be held for an extended period if a borrower wants to purchase a property, renovate it, and lease it up to stabilization in a short amount of time.

Understanding Loan Amortization

The amount of time you calculate the loan’s payments is better known as the loan’s amortization period. It is common in commercial real estate for the loan’s term and amortization periods to differ, also known as split amortizations.

Similar to a loan’s term, an amortization period varies drastically from one transaction to the next. You can determine the loan amortization period on a basis needed to accommodate the specific needs of the commercial real estate sale. Typically, a commercial real estate loan amortization period is between 20-30 years.

What Are Split Amortizations?

An example of split amortization would be a loan with a 5-year term with payments based on a 30-year amortization schedule.

To minimize the amount of cash needed upfront for purchasing commercial real estate, borrowers can rely on the benefit of lower monthly payments. But, at the end of the term, there will be a balloon payment, which consists of the remaining loan balance.

What Are Loan Amortization Schedules?

Once the loan’s amortization has been determined, a schedule is created to detail precisely how much each loan payment is being distributed. The two places the payment goes towards are the loan’s principal balance and interest.

Calculating Your Monthly Payment

When it comes to calculating your monthly payment, you’ll need to keep in mind the loan term vs amortization period to know precisely what you are paying.

There are four critical elements needed in calculating your monthly payment and developing an amortization schedule:

  • Loan term
  • Amortization
  • Loan amount
  • Interest rate

We’ll create a lending scenario by illustrating how these four components work together to form your monthly payment. You are an investor seeking a commercial real estate loan in this situation. Here are your loan terms:

  • Loan term: 5 years
  • Amortization: 20 years
  • Loan amount: $1,000,000
  • Interest rate: 6%

These variables can be plugged into a financial spreadsheet program or commercial property loan calculator to determine a payment amount of $7,164 per month rather than manually calculating the payment. But, when it comes to figuring out your amortization schedule, it becomes more challenging.

Calculating Your Amortization Schedule

Here is how you can calculate your amortization schedule in the first month of your loan:

  • Payment: #1
  • Beginning balance: $1,000,000
  • Interest: $5,000
    • Beginning balance $1,000,000 x interest rate 0.06 = $60,000 annual interest
    • $60,000 annual interest / 12 months = $5,000
  • Principal: $2,164
    • Monthly payment $7,164 (calculated above) – interest $5,000 = $2,164
  • Ending balance: $997,846
    • Beginning balance $1,000,000 – principal = $2,164

Based on this example, your first loan payment of $7,164 will consist of $5,000 towards interest and only $2,164 towards the principal.

Here is how you can calculate your amortization schedule for the second payment of your loan:

  • Payment: #2
  • Beginning balance: $997,846
  • Interest: $4,989
    • Beginning balance $997,846 x interest rate 0.06 = $59,870 annual interest
    • $59,870 annual interest / 12 months = $4,989
  • Principal: $2,175
    • Monthly payment $7,164 (calculated above) – interest $4,989 = $2,175
  • Ending balance: $995,661
    • Beginning balance $997,846 – principal $2,175 = $995,661

Based on this example, your second loan payment of $7,164 will consist of $4,989 towards interest and $2,175 towards the principal.

Calculating Your Balloon Payment

Once your amortization schedule continues for the entirety of the loan term and comes to an end, the remaining balance will be due as a balloon payment.

Based on the scenario above, here is how you can calculate the final payment of your loan and the remaining balance, or balloon payment due:

  • Payment: #60
  • Beginning balance: $851,901
  • Interest: $4,260
    • Beginning balance $851,901 x interest rate 0.06 = $51,114 annual interest
    • $51,114 annual interest / 12 months = $4,260
  • Principal: $2,905
    • Monthly payment $7,164 (calculated above) – interest $4,260 = $2,905
  • Ending balance: $848,996
    • Beginning balance $851,901 – principal $2,905 = $848,996

Based on this example, your sixtieth and final loan payment of $7,164 will consist of $4,260 towards interest and $2,905 towards the principal. As a result, the remaining balance due is $848,996, which becomes your balloon payment.

Why It’s Important to Understand the Differences Between Loan Term vs Amortization Period

Your borrowing costs and mortgage flexibility can be directly impacted by knowing the differences between loan term vs amortization period. Your financial situation, both short-term and long-term, should be balanced by finding the right loan term and amortization period for your sale.

Over the life of your commercial real estate mortgage, you will likely experience multiple terms. That is unless you come into a ton of cash and pay down your mortgage early or have a very short amortization period. The good news is that the amortization remaining will be shorter at each term’s end because you have spent however many months or years prior paying down parts of the principal.

Additionally, it’s important to note that because commercial real estate loan terms are essential to the property’s cash flow projections, understanding the transaction details is crucial. To know the property owner’s level of cash available to be distributed, you must accurately be able to forecast the mortgage payment through the entire duration that they will hold the investment.


Understanding the loan term vs amortization period is just one of many elements of the ever-complex commercial real estate sale mortgage. For example, there are also nuances within small business loans, including the SBA 504 and the SBA 7(A).

Thankfully, commercial real estate lenders and brokers can seek out more qualified leads, negotiate fairer terms, and close on better deals easier than ever with the help of Finance Lobby.

Modernizing Commercial Real Estate Lending is a primary focus of the industry-leading commercial real estate financing online marketplace.

Take 30 seconds to create your personalized lending profile for free through Finance Lobby today!

CRE Loans: Understanding Loan Term vs Amortization (2024)


What is the difference between term and amortization of a commercial loan? ›

Amortization is the length of time it takes a borrower to repay a loan. Term is the period of time in which it's possible to repay the loan making regular payments. Term, therefore, is a portion of the loan amortization period. Consider it the length of time in which one is committing to doing business with the lender.

What is the difference between a term loan and an amortized loan? ›

Here is a short answer: A mortgage term is the length of your current contract, at the end of which you'll need to renew; The amortization period is the total life of your mortgage.

Can amortization term be longer than loan term? ›

For example, a loan could have a term of five years, but the payments could be based on a 25-year amortization schedule. For the borrower, this has the benefit of a lower monthly payment to minimize cash outlay, but it also means that there is a “balloon payment” at the end of the term.

What is the difference between maturity term and amortization term? ›

Amortization is the schedule of loan payments, and the maturity is the date the loan term ends. The amortization period and maturity term can be the same, but sometimes the amortization is longer than the maturity.

What is the difference between a term loan and a commercial loan? ›

Both term mortgages and commercial mortgages are types of loans taken out by businesses. While a term mortgage is generally a short-term, temporary fix to a changing real estate market, commercial mortgages tend to be longer term in nature. Both types have their specific uses in terms of business management.

Are most commercial loans amortized? ›

Unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years, and the amortization period is often longer than the term of the loan. A lender, for example, might make a commercial loan for a term of seven years with an amortization period of 30 years.

What is a simple loan vs amortized loan? ›

Simple interest loans are those that are accepted at a certain interest percentage which is calculated over the life of the amount owed. Amortization is used when there is a set period of time in which the loan will be paid which allows for specifically calculated periodic payments.

What are the two types of amortized loans? ›

There are generally two types of loan amortization in the US:
  • Fixed-rate loan amortization. With a fixed-rate loan, the monthly interest rate remains constant throughout the loan term. ...
  • Adjustable-rate loan amortization. Also known as an ARM, this type of loan has an interest rate that fluctuates over time.
Apr 18, 2023

How do I know if a loan is amortized? ›

An amortized loan is a type of loan that requires the borrower to make scheduled, periodic payments that are applied to both the principal and interest. An amortized loan payment first pays off the interest expense for the period; any remaining amount is put towards reducing the principal amount.

What happens to an amortized loan over time? ›

An amortized loan is one where the principal of the loan is paid down according to an amortization schedule, typically through equal monthly installments. A portion of each loan payment will go towards the principal of the loan, and the remainder will go towards interest charges.

Why might someone choose a long amortization period for a mortgage loan instead of a short one? ›

Longer Amortization Periods Reduce Monthly Payments

Loans with longer amortization periods require smaller monthly payments because you have more time to pay back the loan. This is a good strategy if you want payments that are more manageable.

What does 30-year amortization mean? ›

Maybe you have a 30-year fixed-rate mortgage. Amortization with this loan type means you'll make a set payment each month. If you make these payments for 30 years, you'll have paid off your loan. The payments with a fixed-rate loan – a loan in which your interest rate doesn't change – will remain relatively constant.

How do you amortize a term loan? ›

To calculate amortization, first multiply your principal balance by your interest rate. Next, divide that by 12 months to know your interest fee for your current month. Finally, subtract that interest fee from your total monthly payment. What remains is how much will go toward principal for that month.

What is the difference between term loan A and term loan B amortization? ›

Bank debt, other than revolving credit facilities, generally takes two forms: Term Loan A – This layer of debt is typically amortized evenly over 5 to 7 years. Term Loan B – This layer of debt usually involves nominal amortization (repayment) over 5 to 8 years, with a large bullet payment in the last year.

What does amortized over 5 years mean? ›

Loans that are amortized are meant to pay off the loan balance completely within a set period of time. The final loan payment you make is set to pay off the remaining amount on your loan debt.

What are term loans in commercial bank? ›

A term loan is simply a loan provided for business purposes that needs to be paid back within a specified time frame. It typically carries a fixed interest rate, monthly or quarterly repayment schedule - and includes a set maturity date.

What is the difference between the term depreciation and amortization example? ›

Key Takeaways

Amortization and depreciation are two methods of calculating the value for business assets over time. Amortization is the practice of spreading an intangible asset's cost over that asset's useful life. Depreciation is the expensing a fixed asset as it is used to reflect its anticipated deterioration.


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