What Do Amortization and Re-Amortization Mean?

When most people think about real estate loans, they immediately think of residential mortgages. Generally speaking, most residential mortgages are for 15 or 30-year terms. Residential mortgages are a

A fully-amortized term loan means that the whole loan balance will be paid off over the life of the loan. For example, let's say you take out a 30-year mortgage. Assuming that you pay the loan like clockwork every month, the loan will be fully paid off after 30 years.

Business loans are not always repaid this way.

In fact, the majority of commercial real estate loans are not fully-amortizing.

Many commercial real estate loans have a shorter term (5, 10, or 15 years), but are amortized over a longer period (20 or 25 years). This means that the loan is repaid as if the loan is over the longer period in terms of the monthly payment, but the loan comes due in a shorter amount of time.

When a loan is amortized over a longer period than the term, there will be a principal balance remaining on the loan at the end of the term. This is often referred to as a "balloon". At this time, the borrower will either have to pay off the balance of the loan, or more commonly, refinance the loan. If the borrower refinances the principal balance over a new term, the principal balance will be "re-amortized" over a new period. Oftentimes, the new loan will also be amortized over a longer period than the term again.

What Does It Mean To "Re-Amortize" A Loan?

When you hear someone talk about "re-amortizing" a loan, they are talking about refinancing a the principal balance of a loan over a longer period. By refinancing a loan over a longer amortization, the amount of monthly principal due is lower, resulting in a lower monthly payment for the borrower. When most borrowers refinance a loan to re-amortize the principal balance, it is with the goal of reducing their monthly payment and improving their cash flow.

Why Are Commercial Loans Structured This Way?

The longer the loan amortization, slower that the loan principal gets paid back. Even though a bank may be willing to amortize a loan over an extended period, keeping the term of the loan shorter helps bankers evaluate the quality of the borrower and loan more frequently. 

Things to Keep in Mind

If you are considering refinancing your loan to re-amortize the principal balance, keep in mind that banks typically won't amortize a loan for longer than the useful life of the collateral. For example, if a building has a Remaining Economic Life of 20 years, a bank may not want to have an amortization of longer than 20 years on your loan. The same thing goes for equipment or a vehicle. This is why vehicle and equipment loans are typically amortized over 5 or 7 years; this type of collateral typically has a useful life of no more than 7 years.

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