Why does the term (not the amortization period) matter for a loan?
What implications do different terms have for loans? I'm talking about whether they are due in 10 years, 15 years etc, with a 25 or 30 year amortization schedule. I understand that obviously a 10 year will be due sooner than the 15, but strategically, why do buyers care what the term of the loan is?
The term determines the pricing, risk profile for the lender, and sets up the stage for needed recapitalization and potentially an exit. It's all driven by the lender, as they have to portfolio manage the loan against their liabilities. So why term matters is exactly the same reason why term matters on any bond, like treasuries (i.e. 3 month vs. 10 year etc.).
Amort period really is just for calculation of payment, but it does affect the duration of the bond and hence the risk profile. Hence shorter amort equals better pricing all else equal. In the rest of the bond market, interest only is standard, but mortgages are just used to being amortized so it is a common feature. It does reduce the hell out of refinance risk 10 years out. You can sustain quite a bit of loss in value from NOI or cap rate slippage and still be in positive equity, so it helps the lender justify higher starting LTVs as a result.
Timing and pricing - timing for the reasons you outlined where it will affect when you can realistically refinance/your loan expires and pricing in that the bank’s money will be put “to work” when you have a longer term.
Amortization matters. a loan with a 10-year term will have around 22% of its principal paid back, a loan with a 3 year term will have about 5%. Refinance risk is huge.
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