While residential loans make up the vast amount of loans written, commercial mortgages are just as important. So, what is a commercial mortgage?
At its core, a commercial mortgage is very similar to a residential loan. It is a loan made using property as collateral to secure the loan. Obviously, the prime difference is the property in question is real estate of a business nature instead of a home to live in or land to build on.
By its very nature, a commercial mortgage is a transaction sought by a business, not an individual. In practical terms, this means the business will apply for the loan, and the credit worthiness of the business is the primary issue as well as its revenues. In general, evaluating business credit is more complicated than personal credit.
Another area where commercial mortgages differ from residential ones has to do with the term. The term simply refers to the number of years over which the loan is contracted for. With residential loans, the term is typically 1 – 5 years, and an amortization of 20 – 30 years. When it comes to commercial mortgages, the term is handled much differently. Most commercial mortgages come in the form of balloon loans. This means they have a shorter amortization of say ten years, for example. At the end of the loan period, the loan is not paid off by the monthly payments made. Instead, a percentage of the original loan amount comes due and must be paid as a lump sum payment.
A commercial mortgage is often considered riskier than a residential loan. As a result, lenders adapt to the risk by requiring the borrowing business to pay higher interest rates. The rates can be as high as one to two points more than the prevailing residential rate at that time. But, unlike a residential loan, this interest is tax deductible from the business revenue.
What is a commercial mortgage? It is a way to fund business real estate purchases. While the process works much like a personal real estate loan, it is generally slightly more expensive and a bit more complex.
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Rebecca joins the team with over 20 years of business, investment and real estate experience. A true advocate for the consumer, Rebecca brings you unparalleled integrity with unbiased advice. Phone anytime and discover for yourself just how easy and enjoyable the mortgage process can be.
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