Understanding how a commercial mortgage operates in the commercial real estate development is essential for knowing how to use one for the most effectiveness. Even though they might seem similar, they are distinctly different from residential mortgages in important ways.
While there are a number of similarities between a residential and a commercial mortgage, there are also a number of differences. Perhaps the most obvious is with whom the loan is made. For a residential mortgage, the principal party is an individual (or in some cases a married couple). The rates and terms, or even their eligibility, is determined based on credit worthiness. For many individuals this can be a cause of great deals of stress.
A commercial mortgage is granted to a business, rather than an individual. This is slightly different because many business entities cannot really be assessed based on their credit worthiness. There are two different ways to determine whether a borrower is eligible for such a loan. The first is by the business entity putting up assets to secure the mortgage. This guarantees to the lender that if something goes wrong, that they will be able to recuperate some, if not all, of their investment. The other method that is used for an individual within the business entity to be the principal for guaranteeing the loan. This then provides the lender with a specific person to help determine credit worthiness.
Another distinct difference between a residential and a commercial mortgage is the terms of repayment. For a residential loan, a term, say of 30 years is set. The loan is then amortized over that time period so that each payment includes both principal and interest. While it is possible, in many cases, to pay the mortgage off early, it is not expected. However, the terms of a commercial real estate loan are quite different. They can range anywhere up to 20 years (usually not longer), but the amortization is figured differently. For many mortgages, the amortization period extends past the expected end date of the loan. The reason for this is simple. The lender expects the borrower to pay off the remainder of the loan in a single, large payment after the term is up. For most commercial investors, this is not a problem, because they will have easily made back the amount of the loan through sales or through rentals.
Will I be able to pay off my commercial mortgage early?
It is entirely possible that you will be able to do this. However, it is not always an option with certain lenders, and if it is, there are often penalties and fees associated with prepayment. One such method is an interest guarantee, where the lender is contractually obligated to receive a certain amount of interest, no matter how early the borrower pays off the loan. Another stipulation that might be placed on a borrower is a lockout period, during which the borrower is not allowed to pay off the balance of the loan. If you plan on trying to pay your commercial mortgage off early, make sure you know what your lender will be expecting.
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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