ABSTRACT
Amortization is the process by which a loan, i.e. borrowed capital, is paid off over time. The payment schedule is referenced as an amortization table. It quantifies the payment per period and the proportion of each payment which is principal and interest. The chapter discusses three most common types of amortizations in the context of real estate pro forma modelling: Constant Payment Mortgage (CPM); Interest Only (IO); and Custom Amortization. An IO loan product provides zero amortization, i.e. principal pay down, throughout the life of the loan. It is characterized as a constant balance and constant interest payment throughout the term of the loan. Custom Amortization pays the least in interest by close to $241,866 as compared with CPM. However, Custom Amortization pays close to half the interest when compared with Interest Only. Custom Amortization requires a higher first payment after the IO period when compared to the IO structure, i.e. 58% higher.
