Commercial Real Estate Dictionary

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Amortization

Definitions of Amortization
  • Amortization is the repayment of a debt or financial obligation over a period of time.
    The amortization period on our home mortgage is 30 years.
  • Amortization is the recovery of an asset's cost or value over a period of time.
    The cost of the factory will have to be amortized in 15 years to justify the investment.


What is Amortization?

In lending, amortization is the repayment of a loan through periodic payments. The amount of money borrowed is known as principal. Interest is the cost of using or borrowing this money. In an amortized loan, the payment consists of both principal and interest which vary in proportion over the life of the loan.

Amortization can also refer to the recovery of a capital investment or asset over a period of time. In this sense, amortization helps understand the profitability or productivity of an asset from an investment and finance perspective.

In a simple fully amortized mortgage, the loan will be fully paid off over a given period of time. The borrow will typically make fixed monthly payments of the same amount to the lender until the loan is completely paid off.

Initially, the monthly payments will consist mostly of interest, while a small proportion of the monthly payment will reduce the principal, or outstanding amount borrowed. This makes sense, since in the beginning the amount borrowed is very large, so the interest will be larger.

As payments are made on the loan, the outstanding amount borrowed will decrease. This means the basis for calculating the interest decreases. The result is the portion of the fixed monthly payment that goes to pay off the principal increases. Consequently, the portion of the fixed monthly payment that represents interest decreases.

Not all loans are fully amortized. Loans may be made where there remains outstanding principal payable at the end of the loan term in the form of a baloon payment.


        

Real Estate Terms

1. How much cash will be required to make your mortgage payments? Debt Service >>


2. Who can you go to to finance your construction or development project? Construction Lender >>


3. What professional can assist you in maximizing the value of your investment property? Asset Manager >>


4. How can we assess future commitment to infrastructure to support our communities and future development? Capital Improvements Projects >>


5. What measurement indicates if a property's financial performance can cover its debt? DSCR >>


6. What part of a city is the center of urban economic development? CBD >>


7. What allows property owners and professionals to estimate the market value of a commercial property? Comparable Property >>


8. What can landords do to entice prospective tenants? Concession >>


9. What critical factor do stores depend on to drive traffic? Anchor Tenant >>


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