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By Commercial Lifeline
Commercial mortgage loans are used when purchasing structures such as office
buildings, apartment complexes, health care facilities and retail outlets.
Whether it’s a hi-rise tower or a family-owned restaurant, buyers typically
need additional funding to complete the transaction. Commercial mortgages are
what they pursue.
Similar in many ways to residential loans, commercial mortgages require far
more paperwork. Both types of loan require that the properties being
purchased undergo a thorough appraisal. Both require collateral to secure the
loan and protect the lender against default.
Like residential mortgages, commercial mortgages can be refinanced to take
advantage of more favorable terms, or they can be re-mortgaged to establish a
line of credit to use for running the business. And like residential
mortgages, the lender will hold the deed to the property until such time that
the loan is repaid in full.
During that time, the lender makes money off the interest on the loan. If the
borrower fails to make payments on the commercial loan, the lender has the
right to initiate foreclosure proceedings and take the property. Remember,
the property likely is what will be used as collateral. The interest paid on
the commercial mortgage usually is tax deductible; just be sure to consult
with a professional first.
When you apply for a commercial mortgage, you will typically be offered two
different types of loans: fixed rate loans and variable rate loans. These
work the same as they do for residential mortgages.
On a fixed rate commercial mortgage, the interest rate that is negotiated and
agreed to remains in effect until the loan is fully amortized. If you’re
obtaining a commercial mortgage and interest rates are heading higher, a
fixed rate likely is a better option. You can always refinance your mortgage
should interest rates go lower than your fixed rate.
With a variable rate commercial mortgage, the interest rate will fluctuate
during the payback period. Interest rates are determined by the US Federal
government. Make sure you understand how variable rates are determined. Also,
find out from the lender how often the rate on a variable rate mortgage will
change. It’s fine as long as the interest rate is decreasing; it’s the
increases that you need to worry about. Make sure, too, that should the
interest rates increase, you can still afford the monthly payments. With some
variable rate loans, the rate is fixed for the first few years, and then
converts to a variable rate loan.
When applying for a commercial mortgage, also ask about the Early Redemption
Charge (ERC). Remember, lenders make money off the interest on the loan. When
the loan is repaid in full sooner than 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 to
negotiate it away. If you’re not successful, take your business elsewhere.
Applying for a commercial mortgage means that you’re about to make a serious
investment. Be sure you know exactly what you’re signing before you sign the
documents. You have a right to ask questions, renegotiate more favorable
terms and do whatever else you feel is necessary. It’s your money and your
future. Good luck!
Commercial Lifeline
" target=new>http://www.commercial-lifeline.co.uk”> (http://www.commercial-
lifeline.co.uk”>) are Commercial Mortgage and Bridging Finance specialists.
Download our free Commercial Mortgage guides by visiting our Commercial
Mortgage Guide page.
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