Lenders offer different terms for repayment of your Commercial Mortgage loan. The repayment terms are a combination of the length of repayment, the interest rate and the amortization calculation.
As a simple example to demonstrate using a Residential property, a 30 Year Fixed Rate mortgage with a 30 Year amortization means the length of the loan is 30 Years, the Rate won’t change because it’s fixed, and the loan will be paid in full, or fully-amortized, at the end of the 30 year term based on equal monthly payments.
That example is a typical mortgage for a Residential property. Owners of Residential property may vary in the type of mortgage they take, but the loan illustrated above is a good starting point to illustrate the difference in Commercial loans.Commercial Lenders tend to Offer loans with different combinations of Term, Rate, and Amortization.
A Commercial Mortgage may have a term of 5, 7, 10, or 20 years. But the amortization period used to calculate the equal monthly payments may, in fact, be longer than the term of repayment. In addition, Lenders very often offer variable interest rates on their Commercial Mortgage loans.
Many Traditional Lenders for Commercial Mortgages offer a loan due in full repayment at the end of 7 years, or a “balloon payment”, with a One Year variable rate which adjusts annually for the 7 year term, and a monthly payment calculation based as if the loan were being repaid over a 30 year term.
Commercial Mortgage loans tend to be a riskier financing investment for Lenders. And risk goes directly to the determination of repayment terms. The less risk involved for a Lender on a loan, the more favorable the terms for the Borrower. Thus, it is highly unusual to see a Commercial Mortgage loan offered with similar terms to a traditional Residential Mortgage loan.
The “balloon payment” due at the end of the term of the loan, whether it’s 5, 7, 10, or other, means the Lender expects the entire loan to be repaid at that time. Many Lenders will offer a Borrower the opportunity to refinance their Commercial Mortgage loan with the same Lender. And, as often happens, the Lender will offer similar terms on the newly-refinanced mortgage loan. In this way, Lenders, especially Traditional Lenders, minimize their risk exposure on a given Commercial property and/or the Borrower.
As discussed in our previous blog, “The Right Conversation,” our role as a Broker is to secure the Commercial Mortgage financing solution you need, but also with terms that are most favorable for you and your Commercial property.
For example, we have several Lenders on our list who offer a Commercial Mortgage with terms very similar to the tried and true 30 Year Fixed rate Residential loan. Call us now to find out how we can locate the best financing for your Commercial property.