Commercial & Residential Mortgages
A commercial mortgage uses commercial property as collateral. This is very similar to a residential mortgage that uses a residential property (such as a single family home) as collateral.
Commercial mortgages are typically used by businesses as opposed to individual borrowers. This includes an incorporated business, limited liability company, or partnership.
In many cases, a commercial mortgage is nonrecourse. In short, this means that if the borrower defaults the lender is only able to seize the collateral – in this case the commercial property. They are not able to take make any additional claim against the borrowing party.
Most commercial mortgage loans in the United States require the borrower to make monthly payments over the course of a specific time frame, usually up to 30 years. Along with this, a balloon payment option is often times in place as well.
When applying for a commercial mortgage it is important to note these two details:
- The amortization
- The amount of time until you are allowed to make a balloon payment
The length of commercial mortgages ranges from one month to 30 years. However, there may be a 10 year term, on a 30 year loan, for example, which is known as a 10 year balloon. This allows for an earlier payoff.
Reasons to Apply for a Commercial Mortgage
Generally, commercial mortgages are used to purchase commercial properties or land, expanding an existing building, and even refinancing debt. Commercial properties are usually zoned for industrial, retail, and office use.
A commercial mortgage can be used to purchase most types of buildings, ranging from office space to shops and restaurants to retail space. You may also want to use this type of financing if you have the desire to develop land for commercial intentions.
Interest Rates
The interest rate attached to a commercial mortgage is usually higher than a residential mortgage – you should expect this from the onset.
Fixed rate loans are the most common. With this setup, your interest rate stays the same throughout the term. Although you may opt for a 30 year commercial mortgage, this does not mean that your rate will stay the same for the entire period. Instead, most commercial loans have a fixed term of 3 to 10 years.
Variable interest rate commercial mortgages are also available.
Just like a residential mortgage, the bank will require a lot of documentation to determine your eligibility. This includes 3 + years of audited financial statements as well as a balance sheet, profit and loss statement, and cash flow forecast.
If used the right way, at the right time, a commercial mortgage can help finance the purchase of property and/or land.
