How loan principal is paid down over time.
Amortization is the process of paying down a loan's principal balance through scheduled periodic payments over a defined term. Each payment includes both interest and principal — early in the schedule, most of the payment is interest; later, most is principal. Full amortization means the loan reaches a zero balance at maturity.
A typical mortgage amortizes over 30 years (360 monthly payments). Each payment is the same dollar amount, but the split between interest and principal changes over time. In the first year of a 30-year loan at 7%, roughly 85% of each payment is interest and only 15% reduces principal. By year 20, that split flips — the loan is being paid down quickly in the final third of its life.
Real estate finance offers several amortization variants. Fully amortizing means the loan reaches zero at maturity (typical 30-year fixed). Interest-only means no principal reduction during the IO period (common on bridge, construction, and some DSCR programs). Partial amortization with balloon means the loan amortizes over (say) 30 years but matures at year 7 or 10, requiring a balloon payment of the remaining balance.
Amortization length materially affects monthly payment and DSCR. A $400k loan at 7.5%: 30-year amortization = $2,797/month. 25-year = $2,956. 20-year = $3,224. 15-year = $3,708. Longer amortization improves DSCR and cash flow but costs more in total interest paid over the life of the loan. Most investment property loans use 30-year amortization for maximum cash flow.
For commercial loans, amortization and term are usually different. A typical CMBS or agency loan has a 10-year term with 30-year amortization — meaning the borrower makes 10 years of payments based on a 30-year schedule, then balloons the remaining balance (typically around 85% of the original) at year 10. The borrower expects to refinance or sell before maturity.
| Loan amount | $300,000 |
| Rate / amortization | 7.25% / 30-year fixed |
| Monthly P&I | $2,047 |
| Year 1 interest paid | $21,605 |
| Year 1 principal paid | $2,959 |
| Year 5 ending balance | $284,200 |
| Total principal paid in 5 years | $15,800 |
| Total interest paid in 5 years | $107,020 |
The process of paying down a loan's principal balance through scheduled payments over time. Each payment includes both interest and principal; the principal portion grows over time as the balance shrinks.
Most residential and DSCR loans amortize over 30 years. Commercial loans typically amortize over 25–30 years even when the actual term is shorter (5, 7, 10). FHA offers 40-year amortization on some programs.
An amortizing loan pays down principal each month. An interest-only loan pays only interest, leaving the original principal balance intact. Interest-only is common during construction or bridge periods.
Each payment is calculated as interest on the current outstanding balance plus a fixed total payment. Since the balance is largest at the start, interest dominates early payments. As the balance shrinks, the interest portion shrinks and principal portion grows.
Dramatically — and the interest savings are huge. A $300k loan at 7%: 30-year total interest is ~$418k; 15-year total interest is ~$184k. But the 15-year monthly payment is ~$700 higher.
Matrix structures rental, bridge, and commercial loans with the amortization that fits your strategy — 30-year amort for buy-and-hold, interest-only for value-add.
