Commercial Real Estate Loans Explained in 3 Parts
When you take out a commercial real estate loan, you are likely looking for a great deal. However, it is no secret that mortgages can be complicated. This is even truer for commercial properties than it is for residential ones. There are so many options and it can be difficult to fully understand the ins and outs of real estate loans. The following are the three main parts.
The loan term is the schedule that you will repay it on. There are a few options when borrowing for a commercial property. Intermediate loans can have terms of three years or less. These are typically used as temporary funding while waiting on the sale of other property or to slightly spread out the cost.
Long-term loans can have terms up to about 25 years. Though there are many options in between. The length of the loan affects how many payments you will be making (indirectly affecting the amount of each payment).
Additionally, you may either pay back a fully amortized schedule or a balloon schedule. In the case of the former, you will pay the same amount for every payment (unless you pay early). Balloon loans have lower payments at first but a large lump sum at the end.
Interest rates are fairly straight forward and work the same as any other loan. You will always be paying some interest on the remaining balance of your loan. At first, you will pay mostly interest then you will gradually start paying more and more principal.
Commercial loans typically carry more interest than residential ones. This is because the risk is higher (you are much more likely to keep paying for your home and probably have a steady income). Additionally, businesses typically have less credit history.
Finally, you will pay various closing fees. This is a group of expenses that you need to pay to apply for and receive the loan. These can include an origination fee, property appraisal, inspection, environment assessments, legal fees and more.
Expect that these will range from about 0.5% to 2% of the loan amount. Of course, since some fees are fixed, smaller loans may pay a larger percentage.
When you understand the ins and outs of loan costs, you can make better choices. The above three elements are parts of every commercial real estate loan. Learn more today and get ready to buy your next commercial property.