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If you are looking to purchase a building to conduct business in then now is a great time to consider a commercial mortgage loan. Building ownership has several advantages over renting. You're creating equity and the interest on your loan is tax deductible, lowering your overall gross taxable income. However, a commercial mortgage is also a serious commitment, and obtaining a commercial mortgage loan can be a long and involved process. With the money, you can buy an existing building, construct a new one, purchase an investment property or refinance your current loan.
About Commercial Mortgages
In order to secure a commercial mortgage, you'll need to demonstrate good credit, solid cash flow, and a proven business model. Your company's available cash flow is the most significant deciding factor. Lenders want to minimize their risk by making sure you'll be able to afford the monthly mortgage payments.
There are several types of commercial mortgage loans:
- Fixed-rate loans offer the security of an interest rate that is locked in for the life of your loan. Payments will be the same amount each month, typically over a period of 15 to 20 years.
- Variable-rate loans offer lower initial interest rates. However, the rate is subject to market fluctuations, increasing or decreasing based on the prime interest rate. With variable loans, there's always the risk that your monthly payments could spike.
- Balloon loans offer smaller monthly payments over a shorter term - generally five to 15 years. They're ideal for growing businesses due to the initial cost savings. However, a large lump sum is due at the end of the term to pay off the mortgage.
Commercial mortgage loans are available through banks or private third-party lenders. Banks tend to have lower interest rates but stricter lending requirements. Or, you can hire a commercial mortgage broker to help you find a loan. Brokers will shop multiple lenders to find you the best deal.
Commercial Mortgage Rates
All commercial mortgage rates are based on what's known as the prime interest rate - a number that fluctuates based on market conditions.
Don't expect to pay the prime interest rate, however. Lenders add a percentage of the total loan amount to that prime rate, ranging from just half a percent to several percentage points. They decide how much to add based on factors like your creditworthiness and cash flow.
Commercial mortgages also require a significant down payment - usually anywhere from 20% to 30%. In rare cases, some lenders might require only 10% down, but expect to pay higher interest rates over the life of the loan.
Other Commercial Mortgage Fees
As with residential mortgages, there are a number of fees you'll have to pay during the process of obtaining a commercial mortgage. However, with commercial mortgages, the fees are typically much higher.
- Some lenders charge application and processing fees. They range from a few hundred dollars each to upwards of $2,000.
- Appraisals tend to cost anywhere from $1,000 to $5,000.
- Credit and background checks can add a few hundred to several thousand dollars to your total bill.
- Most companies hire a lawyer to review their commercial mortgage terms. Budget several thousand dollars for legal fees if you opt to do so.
- If you hire a broker, plan on paying anywhere from one-half percent to two percent of the total loan to cover the cost of those services.