A commercial mortgage is very similar in some ways to a residential mortgage, with the main difference being that a commercial mortgage is based on a property that is not a home but a commercial entity. A commercial mortgage is a mortgage loan that has been secured by commercial property, such as an apartment complex, shopping center, industrial warehouse, or office building. Typically, the proceeds from this mortgage are utilized to re-develop, acquire, or refinance commercial property. Commercial mortgages are made so that they meet the needs of both the lender and the borrower.
Typically, commercial mortgages are provided by banks, government agencies, conduit lenders, mortgage brokers, or insurance companies. There are many specifications that cause commercial mortgages to vary. One is the loan amount, which is generally based on debt service coverage ratios and loan-to-value ratios. These mortgages can be structured as first liens, or the borrower can actually be able to get subordinate financing if they desire a greater loan amount. Interest rates for commercial mortgages are either fixed rate or floating rate. In addition to the actual mortgage rates and interest rates, several commercial mortgage lenders will require a good faith deposit or application fee, which will typically be used by the lender to pay for underwriting expenses, such as property appraisals. There may also be underwriting fees and origination fees on commercial mortgages, as well as exit fees that are paid once the loan has been repaid. Typically, the term of a commercial mortgage will be between five and ten years, if the mortgage is for a stabilized commercial property with an established cash flow. If the property is in transition, the term will typically be between one and three years.
However, it is possible for the terms to be much longer than this, as they are on multi-family properties that have been provided by a government agency or government sponsored enterprise. For these properties, the terms can be 30 years or even more. Given that certain conditions are met, in some cases, commercial mortgages will allow extensions, although these often come with the required payment of an extension fee. The borrower will pay both interest and principal over time, with the loan balance at the end of the term being less than the original loan amount, a process called amortization. However, commercial mortgages are different from residential mortgages in that they do not fully amortize over the term of the mortgage, and they will often end with a balloon payment of the balance that remains. This balloon payment is typically paid by refinancing the property. Commercial loans also vary in their pre payment terms, meaning whether or not a real estate investor would be allowed to refinance the loan at will.
If you are in need of a commercial mortgage loan, you should make sure to look at all of your options and talk to a financial advisor before making a final decision. It is a very big commitment, and you should make sure that you know exactly what you are getting into before you enter into it.