Understanding commercial mortgages is important if you plan on being a successful investor of wealth.
What is a commercial mortgage?
A commercial mortgage is a business credit using real estate (i.e. commercial building or other industrial property) as collateral to ensure settlement within an agreed period of time. This is a type of mortgage employed usually by business entities and not private individuals. By business entities, we refer to incorporated businesses, partnerships or limited companies.
Why do businesses avail of commercial mortgages?
The most common reasons for applying for a commercial mortgage are:
- Increase or expansion of current facilities
- Purchase or acquisition of land or industrial assets
- Commercial or residential investment
- Development of properties
Who qualifies for commercial mortgages?
There are several criteria to qualify for a commercial mortgage.
1. "Debt service coverage ratio" - this refers to the proportion of availability of cash to the needed loan settlements. Although many lenders may accommodate some applicants with some unfavorable credit records, most will expect a personal investment on the part of the borrower into the acquisition.
2. Feasibility of the business plan and current business standing - the lenders will want to see where the business is headed to and within what timelines these goals are expected to be achieved.
3. Type of business and type of land - risk factors that affect the business in relation to the nature of the industry and intended use of the premise is likewise considered
What are the general terms for commercial mortgages?
Most U.S. commercial mortgages call for monthly payments that have been scaled small enough to be able to settle the loan within a 20 or 30 year credit period span, with a total payoff within a lesser period of time. In other words, there are two basic elements to the commercial mortgage term. First is the period of time permitted before the total payoff? This can range from 5 to 30 years and can also be referred to as the 'term'. The second is the amortization. If the term of the mortgage is 10 years, with a 30-year amortization timetable, the commercial mortgage will be referred to as a 10/30.
What about interest rates?
One thing to remember is that interest rates for commercial mortgages are definitely higher compared to interest rates in residential mortgages
.
The basic type of commercial mortgage is the 'fixed rate commercial mortgage'. As the name implies, it facilitates a fixed interest rate and payment for a full term loan. It is, shall we say, friendlier to the business budget as its rates do not sway along with fluctuating factors in the business market. This type of commercial mortgage makes planning easier.
Another type of commercial mortgage is the adjustable commercial mortgage funding. In this type, interest rates fluctuate depending in relation to an index that is chosen at the time of the mortgage issuance. The advantage of and ARM (Adjustable Rate Mortgage) is that probability for getting a higher loan amount and the potential savings compared to a fixed rate in the long run. With the ARM, interest rates are changed periodically. This gives the borrower a chance to avail of lower interest rates if the rates go down.
