Terms of A Commercial Mortgage
The majority of Commercial Mortgages in the United States, while requiring the borrower to simply make a monthly payment small enough to pay off the loan over a 20 to 30 year time frame, require a balloon payment (a total payoff) after a lesser time frame. The borrower most likely will attempt at that time to refinance the loan or sell the property. Thus there are two elements generally to the term of a commercial mortgage loan: the length of time allowed until balloon payment (known simply as the term), and the amortization. The length of the loan can vary from a matter of days to 30 years. If a loan had a 30 year amortization schedule, but a 10 year term it would commonly be referred to as a 10 year balloon with a 30 year payment schedule.
As an example, assume a $15,000,000 loan at 8% interest with a 30 year amortization schedule and 10 year term (a 10/30 loan) with monthly payments. The payment amount would be $110,065 per month or $1,320,776 per year if it were on a typical 360 day accrual (in Excel: =PMT(8%/12,30*12,15000000,0)*12 ). The principal balance owed (to the mortgage bank) at the end of each of year would be:
| Year | $ Balance | $ Paid During year |
|---|---|---|
| 0 | $15,000,000 | $1,320,776 |
| 1 | $14,874,695 | $1,320,776 |
| 2 | $14,738,991 | $1,320,776 |
| 3 | $14,592,022 | $1,320,776 |
| 4 | $14,432,856 | $1,320,776 |
| 5 | $14,260,479 | $1,320,776 |
| 6 | $14,073,794 | $1,320,776 |
| 7 | $13,871,615 | $1,320,776 |
| 8 | $13,652,655 | $1,320,776 |
| 9 | $13,415,521 | $1,320,776 |
| 10 | $13,158,706 | $1,320,776 |
At the end of the 10 year loan term, the borrower would have to pay the remaining balance (balloon payment) of $13,158,706. Note: If this table were continued, '$ owed to bank' would reach exactly $0 at year 30 since the loan type is 10/30.
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“Books have their destinies like men. And their fates, as made by generations of readers, are very different from the destinies foreseen for them by their authors. Gulliver’s Travels, with a minimum of expurgation, has become a children’s book; a new illustrated edition is produced every Christmas. That’s what comes of saying profound things about humanity in terms of a fairy story.”
—Aldous Huxley (1894–1963)
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