Understanding the concept of a “Term Loan” is important for real estate investors.

What Is a Term Loan and How Does It Work?

What exactly is a “term loan”? It is a short maturity loan compared with a long or middle maturity loan. Institutional lenders like life insurance companies are willing to make real estate secured loans with a maturity of up to 25 or even 30 years. These loans are typically fully amortized over the loan term.

A term loan can be made by a bank or a private money bridge lender like Montegra. Instead of amortizing the loan principal over 25 or 30 years, a short maturity loan (i.e. term loan) is normally payable interest only. No principal is required in the monthly loan payment, and therefore the entire loan principal must be paid off at maturity – typically 2 to 5 years – in a “balloon payment”. Some banks allow for longer balloon payments – i.e. up to 10 years. These are still term loans as opposed to amortized loans.

To better understand how these loans fit into the real estate landscape, it’s helpful to explore how term loans compare to other common financing types.

Comparing Term Loans to Other Real Estate Financing Options

Most commercial real property loans – except for 25–30 year maturity loans like those made by life insurance companies – should be considered term loans. They can be a “business loan,” sometimes called a “working capital loan,” secured by the earnings of the business. This type of loan is normally made by a bank.

They can also be a real estate loan – secured by a deed of trust on the real property. This type of loan is normally made by both banks and private capital lenders. Most residential loans are longer-term loans – usually amortized with their monthly loan payments and therefore are not in the term loan category. Many, if not most, residential loans do have a balloon payment in 5 or 10 years – even though they are also being amortized over a 25–30-year period.

Types of Term Loans

A “term loan” may be made with adjustable or non-adjustable interest rates. An adjustable-rate loan means that the interest rate can be adjusted upwards (or downwards) if the prime rate or some other specific rate, like LIBOR, goes up or down. This adjustability factor protects lenders who have made longer maturity loans from seeing the interest they receive become out of sync with current interest rates.

The opposite of an adjustable-rate loan is called a “fixed-rate” loan. Borrowers prefer fixed-rate loans since their monthly loan payment will never change during the life of their loan.

In addition to the interest rate structure, term loans can also differ in how payments are made. Instead of amortizing the loan principal over 25 or 30 years, a short maturity loan (i.e. term loan) is normally payable interest only. No principal is required in the monthly loan payment, and therefore the entire loan principal must be paid off at maturity – typically 2 to 5 years – in a “balloon payment”. Some banks allow for longer balloon payments – i.e. up to 10 years. These are still term loans as opposed to amortized loans.

In some cases, term loans may include partial amortization, where a portion of the principal is paid down over the loan period before the remaining balance comes due. Understanding these differences helps borrowers select the structure that best aligns with their investment strategy and cash flow needs.

Advantages and Disadvantages of Long-Term Fixed Rate Loans

While long-term “fixed rate” real estate loans have lots of advantages, they have one big disadvantage. These long-term loans frequently have a “lock-in” provision. This means that if the borrower wants to pay the loan off before its stated maturity date (“prepay”), then there can be a significant prepayment penalty. This can be as much as 5% or even 10% of their loan principal.

The life company lenders do not want to encourage prepayment on their fixed rate loans and they make the early payment painful – and sometimes even prohibit – the prepayment of the loan principal.

Advantages of Long-Term Fixed Rate Loans:

• Provide access to large lump-sum capital for property acquisition or refinancing.
• Offer predictable monthly payments, especially with fixed-rate options.
• Can be structured as interest-only, keeping monthly payments lower during the term.
• Allow investors to leverage equity for short- or mid-term projects.
• Can be easier to secure through private capital lenders for unique property types or situations.
  

Disadvantages of Long-Term Fixed Rate Loans:

• May include prepayment penalties or “lock-in” provisions, limiting flexibility.
• Often require a large balloon payment at maturity, which can create refinancing pressure.
• Typically have stricter underwriting standards from institutional lenders.
• May come with higher interest rates if obtained from private or hard-money lenders.
  Can offer less flexibility than revolving or renewable credit lines.
  

Understanding these pros and cons helps investors evaluate which loan structure aligns best with their goals, project timelines, and financial situation.

The Loan Application and Underwriting Process

Both shorter-term (often called “bridge”) loans and longer-term fixed-rate loans have similar underwriting standards. The lender in both cases reviews the credit history of their borrower, reviews the borrower’s personal financial statement, and looks at the borrower’s cash flow.

Life insurance companies, committing to very long-term loans on commercial real estate, are somewhat stricter than banks and private capital lenders. These private capital lenders (sometimes called “hard-money lenders”) are the most flexible on funding loans to borrowers whose credit and cash flow are not of the highest quality.

However, banks and life companies typically charge lower interest rates than the private bridge lender companies.

How Montegra Helps Colorado Real Estate Investors

Montegra Capital has been funding bridge loans secured by Colorado properties for over 50 consecutive years – longer than any other private capital lender in Colorado. Montegra has the knowledge and experience to provide flexible terms and fast closings that can help their borrowers get a leg up on the purchase and ownership of commercial real estate.

The ability to obtain a firm commitment to receive a loan very quickly and to then close their purchase equally quickly can make the difference between having their offer accepted over other competitive offers.

Contact Bob Amter or Kim Skari at Montegra to explore working with them on your next real estate deal or apply online today.