Understanding how amortization works is one of the most important steps in commercial real estate financing. Whether you are purchasing your first investment property or refinancing an existing loan, the amortization structure directly determines your monthly payment, total interest costs, and long-term financial strategy.
This guide breaks down commercial loan amortization in plain terms, with real payment examples, schedule comparisons, and practical advice for choosing the right structure for your investment goals.
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How Does Amortization Work on a Commercial Loan?
Amortization is the process of paying off a loan through regular installments over a set period of time. Each payment includes two components: a portion that goes toward the outstanding interest and a portion that reduces the principal balance. Over the life of the loan, the balance between these two components shifts dramatically.
In the early years of an amortizing commercial loan, the majority of each payment covers interest charges. Only a small slice actually reduces the principal. As the principal balance decreases over time, less interest accrues each month, and a progressively larger share of each payment goes toward paying down the loan balance.
Here is a simplified example. On a $1,000,000 commercial loan at 7% interest with a 25-year amortization, your monthly payment is approximately $7,068. In the first month, roughly $5,833 of that payment covers interest and only $1,235 reduces the principal. By year 10, the interest portion drops to approximately $4,630 per month while the principal portion rises to about $2,438.
This gradual shift is what lenders and borrowers refer to as the amortization schedule, and it is the roadmap for how your loan gets paid down over time.
The amortization schedule is calculated using a standard formula that factors in three variables: the loan amount, the annual interest rate, and the amortization period. Lenders use this formula to determine a fixed monthly payment that, if made consistently over the full amortization period, will reduce the balance to exactly zero. You can model different scenarios using the Clearhouse commercial mortgage calculator to see how changes in rate or amortization period impact your payments.
According to the Corporate Finance Institute, amortizing loans are structured so that the borrower gradually builds equity, which is a fundamental principle in commercial real estate lending.
What Is the Typical Amortization Period for a Commercial Loan?
The amortization period for a commercial loan typically ranges from 20 to 30 years, depending on the loan type, lender, and property. This is different from the loan term, which is usually much shorter. The amortization period determines how your payments are calculated, while the loan term determines when the remaining balance comes due.
Here is how amortization periods break down by loan type:
- SBA 504 Loans: 20 to 25 years, fully amortizing with no balloon payment
- Agency Loans (Fannie Mae / Freddie Mac): Up to 30 years for multifamily properties
- CMBS / Conduit Loans: 25 to 30 years, with 5 to 10-year terms
- Life Insurance Company Loans: 25 to 30 years, with 10 to 30-year terms
- Bank Portfolio Loans: 20 to 25 years, with 5 to 10-year terms
- Bridge Loans: Typically interest-only with no amortization
- Hard Money Loans: Typically interest-only with no amortization
The choice of amortization period has a significant impact on your monthly payment. A longer amortization period spreads the principal repayment over more years, which lowers each monthly installment but increases the total interest paid over the life of the loan.
For permanent commercial loans, borrowers typically choose the longest amortization period available to minimize monthly cash outflow. Our permanent commercial loan guide covers how these long-term financing structures work in detail. This is especially important for income-producing properties where maintaining strong cash flow is the top priority. According to Finance Lobby, most commercial real estate loans use amortization periods between 25 and 30 years regardless of the actual loan term.
CMBS and conduit loans almost universally use 30-year amortization schedules, even on 10-year terms. This keeps monthly debt service low and helps borrowers maintain favorable debt service coverage ratios (DSCR), which is a key metric lenders evaluate during underwriting.
What Is the Difference Between Loan Term and Amortization?
This is one of the most misunderstood concepts in commercial real estate finance, and getting it wrong can lead to serious financial surprises. The loan term and the amortization period are two separate timelines, and in commercial lending, they almost never match.
The loan term is the length of time you have the loan before it matures. At maturity, the entire remaining balance becomes due. For most commercial loans, terms range from 5 to 10 years.
The amortization period is the hypothetical timeline over which your payments are calculated. If a loan has a 25-year amortization, the monthly payment is calculated as though you will be paying off the loan over 25 years, even if the loan actually matures in 10.
This mismatch creates what is known as a balloon payment. When the loan term expires but the amortization schedule has not fully paid off the balance, the remaining principal is due in a single lump sum. For a detailed breakdown of how balloon payments work, see our guide on balloon payments in commercial loans.
Here is a practical example. You take out a $1,000,000 commercial mortgage at 7% interest with a 10-year term and 25-year amortization. Your monthly payment is $7,068, calculated as if you would pay off the loan over 25 years. But after 10 years, the loan matures. At that point, you have paid down approximately $192,000 in principal, leaving a balloon balance of roughly $808,000.
Most commercial borrowers plan to either refinance the loan at maturity or sell the property. The balloon payment itself is not typically paid in cash. Instead, it is rolled into a new loan. This is standard practice in commercial real estate, but borrowers need to plan ahead because refinancing conditions can change based on interest rates, property values, and lending standards.
According to CFO Perspective, understanding the relationship between the balloon term and amortization term is essential for commercial borrowers because it directly affects both short-term cash flow and long-term refinance risk.
Are Commercial Loans Fully Amortized?
Most commercial loans are not fully amortized. Unlike residential mortgages where a 30-year loan is typically paid off over 30 years with no remaining balance, the majority of commercial loans are only partially amortized. This means the loan term is shorter than the amortization period, resulting in a balloon payment at maturity.
There are three main amortization structures in commercial lending:
Fully Amortized Loans have a loan term that matches the amortization period. The borrower makes regular payments that completely pay off the loan by the end of the term. No balloon payment is required. Fully amortized commercial loans are relatively rare and are most commonly found in SBA 504 loans (20 to 25 years), HUD/FHA multifamily loans (35 to 40 years), and some agency loan programs.
Partially Amortized Loans have a loan term that is shorter than the amortization period. Payments are calculated over the longer amortization schedule, but the remaining balance comes due at the end of the shorter term. This is the most common structure in commercial lending. Examples include a 10-year term with 25-year amortization (bank loan), a 10-year term with 30-year amortization (CMBS loan), and a 7-year term with 30-year amortization (agency loan).
Interest-Only Loans require no principal payments at all during the loan term. The borrower pays only the interest that accrues each month, and the entire original principal balance is due at maturity. Bridge loans, hard money loans, and some construction loans use this structure. For a comparison of interest-only and amortizing structures, see our guide on interest-only vs. amortizing commercial loans.
According to CommLoan, partially amortized loans are the dominant structure in commercial real estate because they balance the lender's need for principal reduction with the borrower's desire for manageable monthly payments.
What Is a 25-Year Amortization on a 10-Year Term?
A 25-year amortization on a 10-year term is one of the most common commercial loan structures, particularly for bank portfolio loans and some conduit products. It means your monthly payments are calculated as though the loan will be paid off over 25 years, but the loan actually matures after just 10 years.
Let us walk through a detailed example using a $1,000,000 loan at 7% interest.
With a 25-year amortization, your fixed monthly payment is $7,068. This payment stays the same for the entire 10-year term (assuming a fixed rate). Each month, a portion goes toward interest and a portion goes toward principal, with the split gradually shifting in favor of principal over time.
After 10 years of payments, here is where you stand:
- Total payments made: $848,160 (120 months at $7,068)
- Total principal paid: approximately $192,000
- Total interest paid: approximately $656,160
- Remaining balance (balloon payment): approximately $808,000
This means that after a full decade of payments totaling nearly $850,000, you still owe about 81% of the original loan amount. That remaining $808,000 is due as a balloon payment when the loan matures at year 10.
The benefit of this structure is lower monthly payments. Compare the monthly payment across different amortization periods for the same $1,000,000 loan at 7%:
Choosing a 25-year amortization instead of a 15-year amortization saves you $1,920 per month, which is $23,040 per year in improved cash flow. For an income-producing commercial property, that additional cash flow can mean the difference between a healthy DSCR and a deal that does not pencil.
The tradeoff is clear: you build equity more slowly and you face refinance risk at the 10-year mark. But for most commercial investors, the lower monthly payment and improved cash flow outweigh the slower equity buildup. Use the commercial mortgage calculator to model your own scenarios and see the exact tradeoffs.
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How Does Amortization Affect Your Monthly Payments?
The amortization period is one of the single biggest factors determining your monthly commercial loan payment. A longer amortization period means lower monthly payments, while a shorter amortization period means higher payments but faster equity buildup and less total interest.
Here is the math for a $1,000,000 commercial loan at 7% interest across four common amortization periods:
- 15-year amortization: $8,988/month, $617,840 total interest
- 20-year amortization: $7,753/month, $860,720 total interest
- 25-year amortization: $7,068/month, $1,120,400 total interest
- 30-year amortization: $6,653/month, $1,395,080 total interest
Moving from a 15-year to a 30-year amortization reduces your monthly payment by $2,335 (a 26% reduction), but it costs you an additional $777,240 in total interest over the full amortization period.
For most commercial borrowers, the focus is on monthly cash flow rather than total interest cost. Here is why: commercial properties are income-producing assets, and the monthly payment must fit comfortably within the property's net operating income. Lenders require a minimum DSCR (typically 1.20x to 1.35x), and a longer amortization period helps borrowers meet this threshold.
In the first year of a 25-year amortization at 7%, approximately 82% of your payments go toward interest and only 18% go toward principal. This ratio improves steadily over time. By year 15, the split is closer to 50/50. By year 20, the majority of each payment is reducing the principal.
This front-loaded interest structure also has tax implications. Commercial property owners can deduct mortgage interest as a business expense, which means the higher interest payments in the early years provide a larger tax deduction. Your CPA can help you model the after-tax cost of different amortization structures.
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What Happens at the End of an Amortization Period?
What happens when the amortization period runs its course depends entirely on whether your loan is fully amortized or partially amortized.
If the loan is fully amortized, the final payment brings the outstanding balance to zero. The mortgage is satisfied, the lien is released, and the borrower owns the property free and clear (at least as far as that particular loan is concerned). SBA 504 loans and certain HUD multifamily loans work this way.
If the loan is partially amortized (which is the case for most commercial loans), the loan term ends before the amortization schedule is complete. At this point, the remaining principal balance becomes due in full as a balloon payment. For a $1,000,000 loan at 7% with a 25-year amortization and a 10-year term, that balloon payment is approximately $808,000.
Borrowers have three primary options when facing a balloon payment:
Refinance the loan. This is the most common approach. The borrower secures a new commercial loan to pay off the balloon balance, effectively resetting the term. Borrowers should begin the refinance process 6 to 12 months before the loan matures to ensure enough time for underwriting, appraisal, and closing. Check out our refinance programs for current options.
Sell the property. If the property has appreciated or the borrower's investment strategy calls for an exit, selling the property generates proceeds to pay off the remaining balance. Any amount above the payoff represents the owner's equity and profit.
Pay the balloon in cash. While uncommon, some borrowers with significant liquidity choose to pay off the remaining balance in cash, eliminating the mortgage entirely.
The key risk for borrowers with partially amortized loans is refinance risk. If interest rates have risen significantly, property values have declined, or the property's income has weakened by the time the balloon comes due, securing favorable refinance terms may be difficult. This is why financial planning and proactive communication with lenders are essential throughout the loan term.
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What Are the Most Common Questions About Commercial Loan Amortization?
Can I choose my own amortization period? You have some flexibility, but it depends on the loan program and lender. Bank portfolio loans offer the most flexibility, typically allowing amortization periods from 15 to 25 years. CMBS and agency lenders usually default to 25 or 30-year amortization. SBA loans have fixed amortization periods based on the loan type (20 or 25 years for real estate).
Does a longer amortization period mean I pay more interest? Yes. A longer amortization period reduces your monthly payment but increases total interest paid over the life of the loan. On a $1,000,000 loan at 7%, choosing a 30-year amortization instead of a 15-year amortization adds approximately $777,000 in total interest costs. However, most commercial borrowers prioritize monthly cash flow over total interest because they plan to refinance or sell before the full amortization period runs out.
What is negative amortization? Negative amortization occurs when your monthly payment is not large enough to cover the interest charges. The unpaid interest gets added to the principal balance, which means you actually owe more over time instead of less. This is rare in standard commercial loans but can occur with certain adjustable-rate structures where payments are capped below the accruing interest amount.
Can I make extra principal payments to pay off my loan faster? This depends on your loan's prepayment provisions. Many commercial loans have prepayment penalties (yield maintenance, defeasance, or step-down penalties) that make early payoff expensive. Some bank portfolio loans allow prepayment without penalty after an initial lockout period. Always review your loan documents carefully before making extra payments.
How does amortization affect my DSCR? A longer amortization period lowers your monthly debt service, which improves your DSCR. For example, if your property generates $10,000/month in net operating income and your debt service is $7,068/month (25-year amortization), your DSCR is 1.41x. If you shorten the amortization to 15 years, your payment jumps to $8,988/month and your DSCR drops to 1.11x, which would not meet most lender requirements.
Is amortization the same as depreciation? No. Amortization refers to the repayment schedule of your loan. Depreciation is a tax concept that allows commercial property owners to deduct the cost of the building (not the land) over a set period, typically 39 years for commercial properties. Both reduce taxable income in different ways, but they are separate concepts.
What happens if I cannot refinance when my balloon payment comes due? If you cannot secure refinancing and cannot sell or pay the balloon in cash, you may be in default. Some lenders offer short-term extensions (usually at higher rates) to give borrowers additional time. This is why proactive planning is critical. Start exploring refinance options at least 6 to 12 months before your loan matures. Read our balloon payment guide for strategies to manage this risk.
What Is the Bottom Line on Commercial Loan Amortization?
Amortization is the engine that drives your commercial loan payments, determines how fast you build equity, and shapes your long-term financial strategy. The key takeaways every commercial borrower should remember:
The amortization period and loan term are two different things. Most commercial loans have terms of 5 to 10 years with amortization schedules of 20 to 30 years. This creates a balloon payment at maturity that requires refinancing or a property sale.
Longer amortization means lower payments but more interest. A 30-year amortization on a $1,000,000 loan at 7% saves you $2,335/month compared to a 15-year schedule, but costs $777,000 more in total interest.
Most commercial loans are partially amortized. Fully amortizing loans (SBA 504, HUD) are the exception. Expect a balloon payment on most conventional commercial financing.
Your amortization choice directly impacts DSCR. Lenders use your amortized payment to calculate debt service coverage, so the amortization period can determine whether your deal qualifies.
Clearhouse Lending helps commercial borrowers nationwide find the right loan structure, including the optimal amortization period, term, and rate for their investment goals. Whether you need a permanent loan with 30-year amortization, a CMBS loan for a stabilized asset, or guidance on an upcoming refinance, our team is ready to help.
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