Understanding Your Commercial Mortgage Terms

Understanding commercial mortgage terms is critically important if you are interested in securing this type of mortgage loan. A commercial mortgage is a type of loan that is secured with a piece of real estate as the collateral. If you are buying a piece of property for your business, this type of loan could provide you with the fund that you need to make the purchase. Here are a few things to consider about the terms of your commercial mortgage.

Balloon Payment

With most commercial mortgages, you will be required to make a balloon payment at some point. The balloon payment is typically the total amount of money that is still owed to the lender. This payment will be substantially larger than the regular payments that you make on the mortgage. 

Amortization

With most partial mortgages, the loan is amortized over a long period of time such as 20 or 30 years. This is how the payments are calculated. The payment will be based on the amount that you owe plus interest and divided by the number of payments over this amount of time. By amortizing the loan in this manner, you will be able to secure a monthly payment that is more affordable.

Loan Structure

With most commercial mortgages, they will combine the balloon payment and a long amortization schedule together. You might have a loan that is amortized over 30 years, but you will have a balloon payment that is due after 10 years. This means that you will have small, regular payments over the first 10 years of the loan. Then at the end of 10 years, you will have to pay the remaining balance on the loan in one lump sum payment. This leads many individuals to refinance the loan shortly before the balloon payment is due. The amount of time until the balloon payment is due is referred to as the term of the loan. Even though the loan is amortized over 20 or 30 years, you really only have 10 years to pay it off if you have a 10 year term. 

Interest Rate

Another important term of a commercial mortgage is the interest rate. When you agree to this type of mortgage, you will have two different types of interest rates that could apply. You could have a fixed interest rate or an adjustable-rate. A fixed interest rate will provide you with a fixed payment over the entire life of the loan term. With an adjustable interest rate, your interest rate will be attached to a financial index. When this financial index increases, your interest rate on the loan will also increase. It can also decrease if market interest rates go down. 

In most cases, using a fixed interest rate is preferred because it provides you with a fixed payment that you can budget for. Some businesses agree to an adjustable rate mortgage because they feel like they can take advantage of the low interest rates in the market and save money.

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