Amortization & interest-only periods

Interest-only debt can make a property look stronger by asking it to pay less.

That is not the same as earning more.

The structure can be useful during renovation, lease-up, or another period when units are offline and income is unstable. It can also hide a property that cannot carry its eventual payment. The difference is not philosophical. It is visible in the note, the amortization schedule, and the first month principal comes due.

Debt stays friendly while the line is slack. Circle the date it takes the load.

Three clocks, one balloon

Amortization is principal repayment spread across scheduled payments. Each payment includes interest and a return of borrowed money, so the balance declines over time.

During an interest-only period, scheduled payments cover interest but no principal. If the borrower owes $10 million on day one, the borrower still owes $10 million when a two-year interest-only period ends, assuming no separate principal curtailment.

Keep these three clocks separate:

• Loan term: when the outstanding balance is due or must be refinanced.
• Amortization period: the schedule used to calculate principal-and-interest payments.
• Interest-only period: the opening window when scheduled principal payments are deferred.

A loan can have a 10-year term, a 30-year amortization schedule, and two years of interest-only payments. It is not 30-year debt. The entire remaining balance is still due in year 10.

Calling the amortization period the loan term is how a balloon gets dressed as a runway.

Month 25 takes the weight

Take a $10 million fixed-rate loan at 6.50%. The documents provide two years of interest-only payments, followed by payments calculated on a 30-year amortization schedule. The loan matures after 10 years.

During interest-only:

$10,000,000 x 6.50% = $650,000 annual debt service

That is about $54,167 per month. The principal balance remains $10 million.

When amortization begins, the monthly principal-and-interest payment is about $63,207, or $758,482 per year. The annual payment increases by roughly $108,482.

Now give the property $850,000 of NOI:

Test	Interest-only period	Amortizing period
Annual debt service	$650,000	$758,482
DSCR	1.31x	1.12x
Cash after debt service	$200,000	$91,518

Nothing about NOI changed. The rate did not move. The original balance did not grow. Yet cash after debt service falls by more than half because the payment structure changes.

If the model distributes most of that early $200,000, investors may credit operations for all of it. Part of that cash exists because principal repayment has not started.

After the loan amortizes for the remaining eight years, the balance is still about $8.87 million at maturity. Interest-only improved early coverage and left more principal exposed to future rates, future value, and future lender standards. The distribution chart gets the loose cash. Maturity inherits the knot.

Underwrite the payment that is coming

Test the property against the amortizing payment from day one, even when the contract grants an interest-only period. That reveals whether the asset supports its debt or only enjoys the opening terms.

The Office of the Comptroller of the Currency makes the same basic point to banks: even when a CRE loan permits interest-only payments, repayment capacity should be tested as though the loan were amortizing under prudent standards. The OCC also warns that interest-only terms can improve near-term coverage while increasing loss severity and balloon or full-repayment risk at maturity.

Interest-only is not automatically reckless. Amortization is not automatically superior. One structure preserves cash now. The other reduces principal now. Your job is to identify which risk the deal is solving and which risk it is handing forward.

How the step-up disappears in a deck

The familiar presentation shows years one and two at the lower interest-only payment, grows rents during those years, and buries the payment reset inside an annual total. The projection assumes the property reaches exactly the NOI it needs before principal repayment begins.

Actual operations can miss by inches and still meet a hard date. Renovations take longer. Occupancy softens. Insurance resets. The rate cap expires. NOI reaches $780,000 instead of $900,000. Month 25 arrives without requesting an update.

Another trick calls the loan “30-year debt” because payments use a 30-year amortization schedule. If the note matures in year 10, the debt has a 10-year term and a balloon. Vocabulary cannot extend a maturity date.

Make the paper agree with the model

Build the payment story from the documents that control it:

• Executed promissory note: original principal, interest rate, default rate, term, maturity, payment dates, and amortization provisions.
• Loan agreement: covenants, cash-management triggers, reserve requirements, permitted debt, extension options, and events of default.
• Amortization schedule: every scheduled payment, interest amount, principal amount, and ending balance through maturity.
• Lender commitment or rate-lock confirmation: quoted structure, index, spread, floors, fees, and conditions that survived into closing.
• Interest-rate cap or swap documents: strike, notional amount, term, counterparty, replacement requirements, and expiration date for floating-rate debt.
• Underwriting model and monthly cash flow: debt service must change in the exact month the note says it changes.
• Covenant calculations: test DSCR and debt yield during interest-only, after amortization starts, and at stressed NOI.
• Extension-option language: conditions, fees, required DSCR, required debt yield, and whether the option belongs to the borrower or requires lender approval.

The amortization schedule is the loan speaking without a salesperson nearby.

Places the payment can be hiding

• Returns work during interest-only but fall below the target after the payment resets.
• The model uses annual debt service and hides the exact recast month.
• The loan is described by amortization length instead of legal maturity.
• Refinance proceeds assume the entire principal balance was paid down during interest-only.
• DSCR is shown only on the lower interest-only payment.
• An extension is treated as automatic even though it has performance tests or lender discretion.
• A floating-rate loan outlives its cap, or replacement-cap cost is missing.
• The exit requires a future lender to accept a higher LTV, lower DSCR, or better value than current math supports.

Questions for the month everyone skipped

1. What month does principal repayment begin, and what is the exact payment before and after?
2. Is the amortization period counted from closing or from the end of interest-only?
3. What is the projected balance at maturity under the actual note?
4. What DSCR does the property produce using amortizing debt service today?
5. How much of early cash flow exists only because principal is deferred?
6. What NOI is required to maintain the loan’s covenant after the step-up?
7. What refinance rate, amortization, DSCR, and LTV are assumed at exit?
8. Which extension conditions could fail even if the borrower wants more time?

Put the four dates on one card

Write down the interest-only end, first amortizing payment, rate-cap expiration, and legal maturity. Beside each date, record the payment, required NOI, DSCR, and remaining principal.

Fill that card directly from the note and amortization schedule. If the model cannot reproduce it, do not trust the smooth distribution line. The debt already knows when it tightens. Equity should know too.

Primary sources

• OCC Comptroller’s Handbook: Commercial Real Estate Lending, Version 2.0
• OCC Bulletin 2024-29: Commercial Lending - Refinance Risk
• Freddie Mac Multifamily: Providing Confidence to Close Through Our Underwriting Platform, 2026

Loan programs and quotes change. The executed note and loan agreement control the actual obligation. This is education, not lending advice.