An amortizing loan is a loan that is repaid over time with a series of fixed payments. The payments consist of both principal and interest, and the amount of principal and interest included in each payment is determined by the loan's term length and interest rate. The borrower gradually pays off the loan's balance until the maturity date, leaving no balloon payment. Amortization Explained and What Is Amortization?

An amortizing loan is a loan where the borrower repays the loan's principal balance — the original amount they borrowed — plus the interest owed on the loan over time up to the maturity date, leaving no balloon payment. With an amortizing loan, payments are spread out in equal sums to be paid over the length of the loan term. Each monthly payment is composed of two parts:

• Principal: The portion of the payment that goes toward the original amount borrowed
• Interest: The portion of the payment that goes toward the cost of borrowing the money

The amount of principal and interest in each payment will be different as the loan matures because the amount of interest to be paid decreases as the principal gets paid down. To better illustrate how amortization works, you can use our mortgage calculator with the attached amortization schedule.

The main benefits of a traditional amortizing loan are that your monthly payments will remain consistent throughout the life of the loan, making budgeting and cash flow planning much easier. Additionally, because you're paying down the principal balance over time, you'll eventually build up equity in the property. This can be beneficial when you refinance or sell the property.

For more information, please see What Is Amortization? and The Benefits and Risks of Interest-Only Loans in Commercial Real Estate.

The main drawback of an amortizing loan is that it can make it difficult to pay off the loan early. Amortized loans are carefully calculated to balance the amounts paid towards the loan’s interest and principal over a long term — meaning most amortized loans carry long loan terms. Additionally, in order to make extra payments on the principal of the loan in order to pay it off sooner, a borrower would need to calculate the amount of the payment that will go toward the principal. Without prior knowledge of how each payment is broken down, this can be a complex process.

For lenders, the amortization can result in a loss of income if the borrower prepays the loan. If the borrower makes a large payment on the principal of the loan, the lender will miss out on the interest that would have been earned on that payment.

Amortization can also make it difficult to sell a loan. If a lender needs to sell a loan before it is fully amortized, they may have to sell it at a discount. This is because the buyer will be assuming the remaining interest payments on the loan.

For more information, please see What Is Amortization? and The Benefits and Risks of Interest-Only Loans in Commercial Real Estate.

Amortizing loans are commonly used in most loan scenarios where the borrower makes periodic installments, such as with a mortgage or a car loan. All HUD multifamily loans including HUD 221(d)(4) loans, HUD 223(f) loans, HUD 232 loans, and HUD 223(a)(7) loans are fully amortizing.

The two main types of amortizing loans are fully amortizing loans and partially amortizing loans. Fully amortizing loans require the borrower to pay off the entire principal of the loan by the end of the loan term. This type of loan is commonly used in HUD multifamily loans, such as HUD 221(d)(4) loans, HUD 223(f) loans, HUD 232 loans, and HUD 223(a)(7) loans. Partially amortizing loans require the borrower to either refinance their loan or make a large, one-time payment (referred to as a balloon payment) before the loan’s term is up.

Sources:

• www.multifamily.loans/apartment-finance-blog/what-is-amortization
• hud223a7.loan/glossary/amortizing-loans