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Loan Amortization - The Overlooked Underwriting Variable


Chicago, Illinois – April 11, 2007 -- Interest rate, loan-to-value ratio, debt service coverage and term are the most popular underwriting variables for commercial mortgage properties. A more often overlooked variable is payment format with loan amortization being the most common.

Lenders usually require some loan amortization to reduce the principal balance during the term. For a borrower, the effects of loan amortization can be staggering. For example, at a 6% rate the difference between an interest-only loan and a 25-year amortization schedule equates to almost 30% greater annual debt service payments with principal pay down. If a 30-year schedule is used, the effects are less drastic, only 20%. If the interest rate is lowered to 5%, a 25-year schedule would have more impact, equating to nearly a 30% premium. With a 25-year amortization, the payments are almost 40% more. By the same token, if the loan is paid off in five years, a 30-year amortization would only have a pay down ranging between 7% and 9%, given these two interest rates respectively. A 25-year amortization schedule would only pay down the loan between 11 and 13%.

By and large, the higher the interest rates, the less impact the loan amortization schedule will have on the underwriting. More interest payments are required in relationship to principal payments. However, given today’s favorable interest rate environment, five key reasons for negotiating more liberal loan amortization payment schedules should be considered:

1). holding period of investment will be relatively short -- usually five years or less.
2). substantial upside in cash flow will occur
3). investor already has ample equity (e.g., 35% or more)
4). early years of cash flow performance are lower because all below-market rents
5). investors simply want a higher annual return

John Oharenko, advisory board member of the Real Estate Capital Institute, remarks “loan amortization is highly negotiable given today’s supply of funds. Lenders frequently offer at least two to three years of interest-only payments on permanent loans.”

The Real Estate Capital Institute is a research organization dedicated to studying national debt and equity capital markets. Rates and mortgage spreads for various properties are available at Each day the Institute also broadcasts hourly interest rate updates via the Real Estate Capital Rateline at 773-227-4825.


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