Choosing the Right Commercial Real Estate Mortgage

Written by Posted On Monday, 29 January 2018 18:21

Knowing your company’s goals when you need to invest in the commercial real estate is one aspect while acquiring the financing and turning it into a reality is something else. Irrespective of how long you have been in business, you will need to be smart and careful when it comes to handling a real estate purchase.  And it all starts with knowing the ins and outs of commercial real estate mortgages. By understanding how you can easily navigate the commercial mortgage process, it becomes easier for you to understand what is required for you to get the best terms and rates. This way, you will probably end up saving a lot of money, leaving you with extra to help you grow your business.  Finding a trusted Commercial Real Estate Advisor would be most beneficial to you as well.

What is a Commercial Real Estate Mortgage?

To begin with, the commercial real estate is a real estate sector that’s used only for business purposes and could include everything from apartment buildings and hotels to office space and retail stores. More often than not, commercial real estate mortgages are given to business entities such as limited liability companies or corporations instead of individuals. These types of loans are mostly put towards buying new or existing land or commercial properties.

Down-payment Requirements

The amount and lending terms of every mortgage often vary depending on the business type, location, and credit score. The amount financed could range from just a few thousand dollars to millions of dollars. Moreover, the length of the mortgage term also varies and repayment periods could span from as little as three years to more than two decades. Most mortgage lenders will often need a down-payment that is about 30% of the buying price, which translates to a loan-to-value ratio of seventy percent. For most businesses, particularly startups, raising this amount of capital could be a problem. Luckily, there are many other sources such as crowdfunding if you are unable to meet the terms of conventional lenders.

Vital Aspects Of A Commercial Mortgage

The three main aspects of a commercial real estate mortgage are the loan terms, interest rates, and the closing fees. When looking for real estate financing, you will need to do some intensive research since comparing offers from different lenders will help you save a lot of money in the long run. Always keep track of all your resources and talk about your financing decision with the relevant parties, and go for a loan offer that makes the most financial sense and that will help you realize your long-term business goals without much strain.

  1. 1.Loan Terms

An intermediate-term mortgage typically lasts for three years or even less, while its long-term counterpart could last between five and twenty years. It is, however, crucial to remember that long-term loans might need collateral or possibly place a limit on the borrower's ability to take a huge financial risk. Moreover, it is critical to understand that a commercial real estate mortgage can either be offered in the form of an amortized loan or a balloon loan. The main difference between these two loan types is that with the latter, you will need to pay a single large payment at the end so as to offset the remaining principle, while the former is typically repaid in fixed installments until the mortgage repayment is finished.

In most cases, balloon loans are normally for intermediate-term loans, though there are a few financial institutions that will give 10-year balloon loans for a commercial real estate. When you consider the balloon repayment option, it is important to note that the final payment could end up being too high. You should only go for this loan option if you can spare the cash or have no problem refinancing when your loan reaches the end of its term.

2.            Interest Rates

The interest rate you will often get greatly depends on your financial health and business income. More often than not, commercial mortgage rates tend to be higher than residential mortgages because of the high risk associated with lending to new companies, the short credit history of the applying businesses, and the absence of recourse to lenders when the mortgage is not repaid. The specific rate will also depend on the lender who gives you the loan. Here are some of the averages from different lender types:

•             Commercial mortgage-backed security lenders: 3% - 5%

•             Life insurers: 3.3.5% - 4.30%

•             Credit unions and banks: 3.5% - 6%

•             Small business administration loans: 4% - 6%

•             Other lenders such as hard money lenders will often have interest rates that are over 10%. Such lenders, however, should only be used when there is a desperate need for cash.

3.            Closing Fees

With commercial real estate mortgages, the most obvious requirement is that you must pay upfront fees to cover the environmental assessment, appraisal, inspection, legal expenses, underwriting expenses, title insurance, and any other associated costs. From a general perspective, the amount of upfront fees should not exceed 2%. Always be clear on what you will be required to pay by asking for a breakdown of all the costs. At the same time, you need to be on the lookout for hidden costs that the lender could add. Some lenders are known to charge higher-than-normal loan application fees or just add a seemingly legitimate expense just to get the extra buck from you.

Doing Your Commercial Real Estate Mortgage Right

Commercial real estate loans typically go through more scrutiny from underwriters than what traditional residential loans would have to and it could take close to three months to complete your mortgage application.

Before applying for a commercial real estate mortgage, it is advisable that you prepare all your financial statements dating three to five years back. This should also include corporate accounting reports, asset statements, tax returns, and any other essential financial information, together with your personal financial records. And as with any other kind of major purchase, you will need to shop around, comparing terms and interest rates from various lenders. This will help you settle on a lender who will best position you to realize your business goals.

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