The Difference Between Loan Terms and Amortization
Understand the difference between loan terms and the amortization period to navigate the complexities associated with CRE loans.
Commercial real estate loans often present more unique situations than residential loans, and therefore require innovative options when it comes to loan terms. Understanding the general principles of loan terms and how they differ from the amortization period can be helpful in navigating the complexities of commercial real estate loans.
Loan Terms
When approved for a loan, a borrower is agreeing to repay the principal balance within a certain timeframe. That period is referred to as the loan term. Commercial real estate loan terms can be up to 30 years, however, they typically range from 1-10 years.
There are many factors that influence the loan terms for a given transaction. The borrower's specific needs, credit score and history, repayment history and exit strategy are some examples of details that lenders will take into account when determining the terms of a loan.
Loan Amortization
It is common for loan terms and the loan amortization period to be confused with one another, however, they are separate and often differ from each other. The amortization period is the time that it should take for the borrower to pay off the debt. It covers different amounts of interest and principal payments for each month of the full term of the loan. It is most common for a commercial real estate loan amortization period to be between 20-30 years. Commercial loans can often be interest only as well, with no amortization period.
After the loan’s amortization period has been established, a detailed schedule showing each payment for the entirety of the loan term. This is known as the amortization schedule and essentially serves as a record of your loan payments.
Choosing a Lender
Not only are there a variety of options when it comes to commercial real estate loans, there are also a variety of lenders. Choosing a lender that can accommodate your individual needs and who understands the complexities involved with commercial real estate investments can ensure a successful partnership.
Alternative lenders, such as private money lenders are a great resource for investors that find themselves involved in a unique investment situation. Private lenders can often provide more flexible terms and less rigorous qualification requirements than institutional lenders. Aside from the lender's ability to provide flexible options, make sure you take into consideration other factors that will influence your loan, such as origination fees, available loan programs, interest rates, documentation requirements, and prepayment penalties.
