Rate Terms of a Commercial Loan
Many people equate a commercial loan to a residential loan but they are nothing alike. Rate Terms of a Commercial Loan typically do not offer the 30 year fix rate with a 30 year amortization. If you do get a fixed rate in commercial, the fixed rate is typically fixed for 15 years and is due in 15 years.
Commercial loan balloons
The typical commercial loan rate is fixed 5 years and amortized over a 20 year period. After the 5th year, the loan balloons. This means you will either need to pay off your loan or refinance your loan.
How Rate Terms of a Commercial Loan are structured so they do not balloon
Today commercial borrowers are in a unique position to combine the benefits of a fixed-rate mortgage with an adjustable-rate mortgage. This is called a hybrid loan (known as an ARM in the residential lending world) which gives you the best of both worlds. A hybrid loan gives you a fixed rate term, usually three, five, seven or ten years, with an adjustable-rate thereafter. These loans are typically expressed as a 5 fixed with a 20-year amortization. The hybrid adjustable will either adjust after the fixed period either every month, every quarter, or once a year. Or the hybrid adjustable will reset to be fixed for another 5 years.
Pre-Payment Penalty on Commercial Loans
When you have a fixed rate for a fixed period of time, the lender will have a pre-payment penalty typically the length of the fixed period. For example, if you have a five-year fixed rate then you will have a 5-year prepayment penalty.
Advantages of the Hybrid
- You avoid a balloon payment.
- Lower fixed rate than a 15 year mortgage.
- Borrower’s have an option of a fixed rate for 3, 5, 7 or 10 years.
- Borrower’s have an option of a 20 year amortization, 25 year amortization or 30 year amortization