Commercial real estate loans are specialized, to fit the needs of landlords and owners who have tenants and customers in mind. When you need financing for a commercial real estate property, there may be many factors to consider before applying for a loan. These include whether your business has sustainable growth potential and if you have sufficient liquidity to pay your monthly loan payments.
What Is a Commercial Real Estate Loan?
The commercial real estate market is a large and growing segment of the United States economy. The real estate market can be broken down into two categories: office buildings and shopping centers. No matter what type of property you’re interested in, there are lenders that specialize in making commercial real estate loans.
Just as with home mortgages, banks, and independent lenders are actively involved in making loans on commercial real estate. In fact, many banks are now lending directly to property owners or tenants who want to finance their own projects.
If you’re looking for a loan on commercial real estate, but don’t have the cash flow to qualify for one, consider borrowing from a bank or other lender instead of going it alone. If you choose this route, you’ll be able to work closely with an intermediary who will help guide you through the application process and make sure that everything is done correctly so that your loan goes through smoothly and quickly.
Loan Repayment Schedules
The loan repayment schedule of a residential mortgage is based on the amount and length of time the loan will be repaid. The payment amount of a residential mortgage will vary depending on the interest rate, term and amount owed.
For example, an adjustable-rate loan has an initial interest rate that may increase over time as well as an additional rate that may decrease over time. This type of loan generally has a fixed term and pays off at the end of the term with no additional payments after it ends. A fixed-term loan has a set number of years it will take to pay off debt, but it doesn’t have any adjustments made to its interest rate during that term.
A balloon-payment mortgage allows borrowers to make extra payments toward the principal balance of their loan during certain periods in order to reduce their monthly payments and interest costs more quickly.
Commercial Real Estate Loan Interest Rates and Fees
Interest rates on commercial loans are generally higher than on residential loans. Also, commercial real estate loans usually involve fees that add to the cost of the loan.
Commercial real estate loans are typically a more expensive option than a traditional residential mortgage because they often require more collateral and have longer maturities. The interest rate for commercial real estate mortgages is usually higher than for residential mortgages and can be as high as 8% or more in some cases.
The closing costs associated with commercial real estate loans can also be higher than those for residential mortgages. Many lenders charge a fee when you refinance an existing loan into another type of financing, such as home equity lines of credit (HELOCs) or home equity loans. This fee is known as origination points and is generally 1% to 2% of the new loan amount, depending on the lender’s requirements. You may also have to pay additional closing costs if your property isn’t located in the same state as your home mortgage loan originated.
These costs can add up quickly if you’re refinancing multiple properties or taking out multiple loans at once. It’s important to compare interest rates and fees before choosing which type of financing will work best for you
Prepayment
A commercial real estate loan may have restrictions on prepayment, designed to preserve the lender’s anticipated yield on a loan. This is usually because the borrower has to pay off the entire amount of the loan at one time. If they can get a lower rate and pay off the loan in smaller chunks, they can stretch out the payment and make it more affordable.
Some lenders are willing to work with borrowers who have good credit but have limited cash flow availability. In this case, you might be able to get an extended term loan that allows for easy prepayment.
Conclusion
Whether you’re a small business owner searching for commercial property to lease, or a lender looking to help fund commercial real estate loans, you’ll want to learn all you can about commercial real estate financing. This guide should acquaint you with some of the basics and help you get started in your search for the right loan.
