3 Biggest Parts of a Commercial Real Estate Loan
Investing in real estate is an exciting way to improve your finances and grow your business. Whether you’re using your commercial real estate for your business location or to lease for another company, find out how a commercial loan can help you take advantage of a great real estate opportunity today. Here are three key components of a real estate loan.
First, you need to understand the loan term. This is the schedule or timing of loan payments. These payments are predetermined, so you know what you’re getting into before you take out a loan. Loan terms can be any number of years in length, but most loans must be repaid between 5 and 20 years.
Your loan term can be defined in one of two ways: amortized or balloon. An amortized loan works just like a residential loan. It comes with a predetermined length and interest rate. You are required to make monthly payments for a certain amount of years. At the end of the loan, you’ll have paid off the entire loan amount. Some amortized loans come with penalties for early payment, but others allow you to pay the loan off early. This can save you hundreds or thousands on interest.
More common for commercial real estate is a balloon loan. The loan is a short-term or intermediate-term loan that requires you to make monthly payments, just like an amortized loan. However, the monthly payments aren’t sufficient to pay off the entire loan amount. At the end of the term, typically 5 to 7 years, you are required to pay off the rest of the loan amount.
Commercial loans have interest rates, just like residential mortgages or personal loans. Higher interest rates are used for short-term or high-risk commercial loans. Look for the lowest interest rate to reduce the overall payment of your loan. You’ll typically need to have a high credit score in order to qualify for lower interest rates.
The final factor to consider when shopping for commercial real estate loans is the closing fee. While a low-interest rate typically means a more affordable loan, many financial institutions charge high closing fees for a variety of services. A closing fee typically costs between .5 and 2%, but it can range depending on the exact type of loan you receive. Ask your lender about any fees involved to make sure you understand the upfront and long-term costs of your loan.