Commercial Mortgages 101

Commercial loans are much different from residential mortgages because of the way the financing is structured and the loan requirements. These types of mortgages are often taken by a business entity instead of a single applicant – because of this, it can be a little more complicated to analyze and secure commercial mortgages. Due to the complex process there are many elements of the application that will determine whether or not a business is creditworthy. The two most important things for you to keep in mind are how long you have to repay the loan and what type of interest rate there is.

The majority of the loans offered are fixed and you can find comfort in knowing that the interest rate will not increase, leaving you with unreasonable payments. There are some borrowers who choose to use a higher interest rate although they are obligated to lower payments. This still puts you at risk if the rate isn’t fixed because it can increase your monthly payment.

With commercial mortgages the loans consist of balloon payments. This implies that after a certain period of time in which the borrower is making small payments, they will have to make a larger final payment or pay off the rest of the loan amount quickly. This often consists of a higher interest rate and it can take you longer to re-pay the loan. These are details to talk about with a representative so that you can take advantage of starting a business without having to worry about long term debt.

How to Compare Rates

You must take the maximum loan term into consideration and find one that allows you to pay off the mortgage safely. The majority of commercial mortgages are based on an amortization schedule of twenty to thirty year terms. Compare the loan to value amount as well because banks are usually conservative in their approach, typically offering lower interest rates and terms to borrowers with lower loan to value ratios. The more money you can put towards the mortgage to reduce the financed amount or to increase the overall equity available in the property, the better your chances of securing suitable financing.

Look into how long the approval time takes. Compare mortgages by asking for estimates and how strict they are with lending terms. You can confide in the committee as they are the ones who will look over your application. If you need the approval quickly you’ll want to ask about the processing time beforehand. To qualify for commercial mortgages ask for a commitment letter before applying. This will disclose rates that have been discussed and agreed upon.

Consider asking about how the lenders appraise and what the miscellaneous fees are that apply to your application (even upon a rejection.) It’s your responsibility to look into the fees before you start to apply. Commercial mortgage loans are not cheap. There are usually upfront costs involved in the process and you want to be aware of what they are. Fixed as well as adjustable loan programs are available and it is usually recommended to first-timers to play it safe by choosing a fixed rate mortgage program. You’ll want to compare the interest you pay when the loan term has ended as well. Commercial mortgages can work in your favor as long as you do research and find a lender who caters to your business and budget needs.