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A Brief Commercial Mortgage Guide
By Darren Yates, Thu Dec 8th
Commercial loans are used when purchasing structuressuch as office buildings, apartment complexes, health carefacilities and retail outlets. Whether it’s a hi-rise tower or afamily-owned restaurant, buyers typically need additionalfunding to complete the transaction. Commercial mortgages arewhat they pursue. Similar in many ways to residential loans, commercial mortgagesrequire far more paperwork. Both types of loan require that theproperties being purchased undergo a thorough appraisal. Bothrequire collateral to secure the loan and protect the lenderagainst default. Like residential mortgages, commercial mortgages can berefinanced to take advantage of more favorable terms, or theycan be re-mortgaged to establish a line of credit to use forrunning the business. And like residential mortgages, the lenderwill hold the deed to the property until such time that the loanis repaid in full.
During that time, the lender makes money off the interest on theloan. If the borrower fails to make payments on the commercialloan, the lender has the right to initiate foreclosureproceedings and take the property. Remember, the property likelyis what will be used as collateral. The interest paid on thecommercial usually is tax deductible; just be sure toconsult with a professional first. When you apply for a commercial mortgage, you will typically beoffered two different types of loans: fixed rate loans andvariable rate loans. These work the same as they do forresidential mortgages. On a fixed rate commercial mortgage, the interest rate that isnegotiated and agreed to remains in effect until the loan isfully amortized. If you’re obtaining a commercial andinterest rates are heading higher, a fixed rate likely is abetter option. You can always refinance your shouldinterest rates go lower than your fixed rate. With a variable rate commercial mortgage, the interest rate willfluctuate during the payback period. Interest rates aredetermined by the US Federal government. Make sure youunderstand how variable rates are determined. Also, find outfrom the lender how often the rate on a variable rate mortgagewill change. It’s fine as long as the interest rate isdecreasing; it’s the increases that you need to worry about.Make sure, too, that should the interest rates increase, you canstill afford the monthly payments. With some variable rateloans, the rate is fixed for the first few years, and thenconverts to a variable rate loan. When applying for a commercial mortgage, also ask about theEarly Redemption Charge (ERC). Remember, lenders
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make money offthe interest on the loan. When the loan is repaid in full soonerthan anticipated, the lender loses money. To avoid losing money,lenders often include an ERC which can amount to a substantial,one-time sum. If you discover an ERC in the fine print, try tonegotiate it away. If you’re not successful, take your businesselsewhere. Applying for a commercial means that you’re about tomake a serious investment. Be sure you know exactly what you’resigning before you sign the documents. You have a right to askquestions, renegotiate more favorable terms and do whatever elseyou feel is necessary. It’s your money and your future. Goodluck! About the author:Commercial Lifeline are Commercial Mortgageand Bridging Finance specialists. Download our free Commercial guides by visiting ourCommercial Guide page. This article comes with reprint rights. Feel free to reprint anddistribute as you like. All that we ask is that you do not makeany changes, that this resource text is include, and that thelink above is intact.
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