A commercial mortgage is a type of loan used to finance the purchase or refinancing of property that is intended for commercial use. This can include office buildings, retail spaces, warehouses, and other types of non-residential properties.
Commercial mortgages typically have different terms and requirements than residential mortgages. They often have higher interest rates, shorter loan terms, and larger down payment requirements. Additionally, lenders may require the borrower to provide more detailed financial information and may conduct a more rigorous evaluation of the property’s potential income.
Commercial mortgages can be obtained from banks, credit unions, and other financial institutions. The terms and conditions of the loan will vary depending on the lender, the borrower’s financial situation, and the type of property being financed.
Types of commercial mortgages
There are several types of commercial mortgages, each with its own set of features and requirements. Here are some of the most common types of commercial mortgages:
- Fixed-rate mortgage: A fixed-rate mortgage has a set interest rate that remains the same throughout the term of the loan. This provides stability and predictability for the borrower, but typically comes with higher interest rates.
- Adjustable-rate mortgage: An adjustable-rate mortgage (ARM) has an interest rate that can fluctuate over time. The rate is usually tied to an index such as the prime rate or LIBOR, and may adjust periodically based on changes in that index.
- Balloon mortgage: A balloon mortgage has a relatively short term, such as 5 or 7 years, but a longer amortization period, such as 20 or 25 years. This means that the borrower makes smaller monthly payments during the term of the loan, but must pay off the remaining balance in a lump sum at the end of the term.
- Bridge loan: A bridge loan is a short-term loan used to finance the purchase of a property or to bridge the gap between the purchase of a new property and the sale of an existing one. Bridge loans typically have higher interest rates and fees.
- SBA loan: SBA loans are backed by the Small Business Administration and are designed to help small businesses finance the purchase of commercial property. These loans typically have lower interest rates and longer repayment terms than traditional commercial mortgages.
The specific type of commercial mortgage that is best for a borrower will depend on their individual needs and financial situation.
How do commercial mortgage interest rates work?
Commercial mortgage interest rates are typically determined based on a variety of factors, including the current market conditions, the borrower’s creditworthiness, the type and location of the property being financed, and the loan-to-value ratio.
In general, commercial mortgage interest rates tend to be higher than residential mortgage rates, because commercial properties typically carry more risk and require larger loan amounts.
The interest rate on a commercial mortgage may be fixed or variable. With a fixed-rate mortgage, the interest rate remains the same throughout the term of the loan. With a variable-rate mortgage, the interest rate can fluctuate over time based on changes in the market.
Commercial mortgage interest rates may also be affected by the term of the loan. Longer-term loans typically have higher interest rates, while shorter-term loans may have lower rates.
Finally, lenders may charge additional fees or points on top of the interest rate. These fees can include origination fees, application fees, and closing costs, and can vary depending on the lender and the specifics of the loan. It’s important for borrowers to understand all of the costs associated with a commercial mortgage before applying for one.