What Is Amortization on an Apartment Loan? Schedule, Term and Balloon
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Amortization is paying down a loan's principal through regular payments over a set schedule. Each payment covers that month's interest first, and the rest reduces the balance, so early payments are mostly interest and later ones mostly principal. On apartment loans the amortization period (often 30 years) is usually longer than the loan term (often 5 to 10 years), which leaves a balloon balance due at maturity.
A worked example (hypothetical)
A $4,000,000 loan at 6% with a 30-year amortization has a monthly payment of about $23,982, or about $287,784 a year.
| Topic | Amortizing (30-year) | Interest-only |
|---|---|---|
| Year 1 payments | $287,784 | $240,000 |
| Year 1 interest | $238,664 | $240,000 |
| Year 1 principal paid | $49,120 | $0 |
| Balance after 10 years | about $3,347,000 | $4,000,000 |
If the loan term is 10 years, about $3.35 million is still due at maturity. The amortizing loan's higher payment lowers cash flow by about $47,800 in year 1 but builds equity. See interest-only periods and the loan constant.
Why does amortization matter to a syndication?
- Cash flow: lenders size loans on debt service, so amortization changes the DSCR and the cash left to distribute.
- Returns: principal paydown adds to equity at sale, part of total return, not cash in hand each quarter.
- Exit: the balloon sets the refinance or sale date. Check the loan terms in loan terms investors should check.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings from their friends and followers under Rule 506(b) or 506(c), and verifies that every investor is accredited before they sign, in both. Investors fund by wire into the deal's escrow account at Enterprise Bank & Trust. Sponsors pay a $1,500 setup fee (non-refundable) and a flat $5,000 a year administration fee; see pricing.
FAQ
What is the difference between amortization and the loan term?
Amortization sets the payment schedule; the term sets when the remaining balance is due.
What is a balloon payment?
The remaining loan balance due at maturity when the loan has not fully amortized.
Is interest-only better?
It raises cash flow during the interest-only years but builds no equity through paydown and leaves a larger balance at maturity.
Sources
This article is general information, not legal, tax or investment advice. Talk to your own CPA and attorney about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.