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Helpful Commercial Mortgage Calculator Terms and Definitions

 

Amortization: A fixed repayment schedule is an example of a method of paying off debt. Payments consisting of both principal and interest (as specified in the loan agreement) are paid off over a set period of time. The structure typically involves a declining payment of interest, where more interest is paid (in comparison to principal) towards the beginning of the repayment and gradually decreases over time, allowing more principal to be paid towards the end of the loan term.

Balloon Payment: The large payment sum due towards the end of a commercial or amortized loan. Balloon payments usually occur with short loan terms where only a portion of the principal is amortized.

Collateral: Assets or Property of value introduced to the lender as an assurance of worth in order to secure the loan. If a situation arises where the borrower stops making payments towards the debt (whether intentionally or due to unforeseen circumstances), the lender can seize the collateral in order to cover their loss. These claims to collateral assets by lenders are known as liens. When the loan amount is paid in full, the assets are no longer deemed as collateral. Typically, loans secured by collateral tend to have lower interest rates.

Debt Service Coverage Ratio ( DSCR ): This is a way to quantify the borrower's ability to pay back outstanding debt obligations. A borrower's "debt service" is the cash flow required to cover a standard payment of principal and interest on debt within a payment period. With DSCR the borrower's net operating income is required to determine the debt service coverage ratio. The formula to determine DSCR is Net Operating Income / Total Debt Service. If the resulting value is greater than one, it shows the borrower is capable of repaying their debt. Conversely, a value less than one would mean an inability to cover the debt service.

Loan To Value Ratio ( LTV ): This figure represents the ratio of debt in relation to the value of the collateral involved. Lenders use LTV to quantify borrower leverage, as well as determine the level of risk involved in lending the specified sum. The formula for LTV is Loan Amount / Total Value (of Collateral).

Maturity Date: Denotes the date that the final principal payment on a loan is to be paid. The maturity date is often viewed as the "lifespan" of a loan. Once the last principal payment is met, interest payments also cease, and the debt is considered fulfilled.

Prime Rate or Prime Lending Rate: A standard for comparing interest rates offered by lenders. This is essentially the interest rate given to a lender's most creditworthy clients. This rate is based on the verifiable assumption that these larger commercial borrowers have a much lower risk of defaulting on a payment.

Principal and Interest (P&I): Payments on debts are typically broken down into two basic units. The first is known as "Principal". Principal is the original sum of money borrowed from a lender. Interest is a percentage of the principal that acts as the fee for borrowing from the lender.

Refinance: When a borrower meets with a lender to revise any previous payment schedule on a loan. When a debt is refinanced, the original loan is considered "paid off" and replaced with the newly revised pay schedule which is viewed as a new loan altogether.

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