August 22, 2022
We thought it might be helpful for new investors if we wrote briefly about different loan terms/definitions so there is better understanding of the various aspects of a commercial loan.
- Amortization – An amortized loan is a loan that requires periodic payments of both principal and interest. The loan can be amortized for different periods of time, typically 30 years, this is known as the Amortization Period. This is not to be confused with the word Term.
- Term – The Term is when the note or full principal amount is due. This is also known as the Maturity Date. Sometimes the Term is less than the Amortization Period. When the final payment amount due is great than the any of payments already made, this know as a Balloon payment.
- Interest – This is the amount the lender charges you, the investor, for the money/principal you are borrowing.
- Loan to Value (LTV) – This ratio compares the loan amount or principal being borrowed to the value or purchase price of the property. Typically, commercial lenders will provide loans around 70% LTV. This means the borrow is able to obtain a loan for 70% of the value or purchase price of the asset. The remaining 30% is the original equity the borrower has in the asset through down payment.
- Principal – This is the amount borrowed. The Principal is paid down on a periodic basis in the typical amortized loan. At the end of the Term, the full Principal amount will have been paid back or is due.
- Origination Fee – This is the fee the lender charges the borrower to obtain the loan. This fee is due at closing. It is comprised of various expenses the lender takes on such as appraisal, title search, credit report, recording fees, loan officer review of borrower paperwork etc. Sometimes this fee is broken up into line items on the closing statement. Other times it is shown as a percentage point such as 1% of the loan amount.
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