A commercial real estate loan can be a good option for financing commercial buildings and property. You might have heard that residential real estate loans are easier to get than commercial/commercial real estate loans. This isn’t always true, and there are things that determine whether commercial or residential loans are best for you.
What Is a Commercial Real Estate Loan?
Commercial real estate loans are a way for businesses to borrow money from banks and other lenders. These loans can be used to purchase buildings, offices, shopping centers and other properties. Commercial real estate loans are also known as commercial mortgages or construction loans.
Commercial real estate loans are just like residential mortgages in many ways. In fact, many lenders will make both types of loans available at the same time. However, there are some important differences that make commercial real estate loans different from residential ones.
Here’s what you need to know about commercial real estate loans:
Loan Repayment Schedules
You can choose from a variety of loan repayment schedules to suit your personal financial situation, including the following:
5/1 ARM. This is a typical 30-year fixed rate mortgage that has no prepayment penalty. You’ll pay each month $1 per $1,000 borrowed, and the principal and interest are due on the fifth day of the month every month. For example, if you take out a $150,000 loan using this payment plan, you’ll repay $1,500 every month.
10/1 ARM. This is another fairly common 30-year fixed rate mortgage that has no prepayment penalty. You’ll pay each month $1 per $1,000 borrowed, and the principal and interest are due on the tenth day of the month every month. For example, if you take out a $150,000 loan using this payment plan, you’ll repay $10,500 every month.
15/1 ARMs are also available but they’re much less popular than their counterparts because they’re typically subject to higher rates of interest and have lower purchase prices than other types of loans.
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 total cost of getting a loan.
Here are some of the most common fees:
Origination fee: The fee you pay to the lender when you apply for a loan. This fee can be anywhere from 3% to 6%, but it’s usually around 4%.
Appraisal fee: If you want your property appraised before purchasing it, there’s a fee for that. Appraisals typically cost between $100 and $200, and they often go toward paying the appraisal company’s fees.
Processing fee: You’ll pay this if you provide additional documentation or require additional steps to close on your property purchase. Processing fees can vary depending on the type of transaction, but they’re typically less than 1% of the total origination amount.
Brokerage commission: Brokers earn a commission when they sell a commercial property for their clients; this commission is typically paid by the seller and not by you as an investor (unless you’re selling yourself).
Prepayment
A commercial real estate loan may have restrictions on prepayment, designed to preserve the lender’s anticipated yield on a loan. In addition, some lenders will not allow you to prepay a single-family home mortgage unless you can document that you will refinance with them at an interest rate equal to or lower than the amount of the prepayment.
You should check your loan documents carefully before making any decisions about prepayment. If you decide to pay off your loan early, make sure that you understand all of the terms and conditions of your agreement with your lender.
Conclusion
Commercial loans are great and have many benefits, the most important being: the upfront money you can receive from the lender and the interest rates. There are a few drawbacks, including a longer time period to recoup your investment than with a residential property loan. For this reason, you should never take out commercial mortgages with low-income properties as collateral for more than 75% of the appraised value of the property.
