Commercial real estate loan rates have steadily increased over the past few years. Given the increase in rates, it’s however essential for investors to have access to commercial real estate loan rates that they can afford. In this post, we’ll explain the definition of commercial real estate loan and cover some factors that affect the loan rates.
What Are Commercial Real Estate Loans?
A commercial real estate loan is a type of loan that is used to finance investments. This type of loan can be used to purchase or renovate owner-occupied properties, as well as income-producing commercial properties. For example, you can use a commercial mortgage loan in Phoenix to finance a retail center, a mixed-use building, and office buildings.
How Are Interest Rates Structured?
Commercial real estate loan interest rates are structured in three different ways: fully amortizing loans, balloon rates, and interest rate reset. Fully amortizing loans require you to pay off your interest during the loan term. For example, Commercial Mortgages and Commercial Bridge Loans in Phoenix is a fully amortizing loan over, so you will need to make payments on your principal and interest until the loan is entirely paid off.
Interest rate resets tend to have a different rate. The loan starts by giving the borrower a fixed interest rate for a certain amount of time. The interest rate either goes up or down based on the prime rate after their time is up. By then, the borrower will be responsible for paying the new interest rate pending his/her next reset date or until he/she pays off the loan.
Commercial banks usually issue balloon loans that allow borrowers to start making little monthly payments, and over time, the fees gradually increase. The amortization period is often longer. Most people in this type of condition either pay their balances in full or refinance the loan.
Factors That Affect Commercial Real Estate Loan Rates
The lending institute will review a plethora factors when determining commercial real estate loan rates. Below are some of the factors that determine your loan rate in Phoenix.
1. Size of the loan
Commercial loans with a short-term duration have lower rates while the long-term loans have higher rates. Hard money loan is the only exception to this rule because the lender works with you by charging higher rates for short-term financing.
2. Loan to value
Borrowers financing a higher percentage of the overall value of the collateral are viewed as higher risk, due to this, the higher the LTV, the higher the interest rate. Clopton Capital, commercial mortgage broker allows a maximum 85% LTV on multifamily and mixed-use properties.
3. Prepayment Options
The repayment option comes with a standard prepayment fee as a percentage of the balance. The lender can accept a slightly higher interest rate if they’d like the ability to pay off their loan after a given period. Loans with prepayment options are considered less risky for investors.
4. Credit Score
A good credit score is a leading indicator of how consistently the borrower has made payments over time. It shows the measure of a willingness to repay debts. It helps achieve the lowest rate possible for your loan.
5. Property Types
Multifamily and mixed-use properties are considered less risky and tiered to feature lower interest rates when compared to a light industrial or automotive property. Besides, there is less risk associated with owner-occupied properties, which are less expensive to finance than investor-owned properties.
6. Reportable Liquid Assets
Investors can use reportable liquid assets held in savings or checking account or other accounts for down payment. A lack of reportable liquid asset can affect your chances of obtaining a commercial real estate loan. Moreover, if you are approved, it can have a negative impact on your loan rate.
How To Qualify
Qualification requirements vary widely based on the type of loan you want to get. To qualify for any Commercial real estate loans, you need to have a healthy credit score, ideally above 650. Good collateral and sufficient down payment can make you a more qualified loan applicant. You can use a commercial real estate as collateral if you have no equity in the real estate.
However, when planning for a renovation, you’ll need a bunch of documents before your loan can be approved these include, but not limited to the following: blueprints and specs for the renovation, itemized budget from your general contractor, materials list, draw schedule, and building permits (if applicable). Also, you may need the business and personal tax returns and business bank statements.
Benefits Of Commercial Real Estate Loans
Investors who are looking to renovate or buy commercial property should know that commercial real estate loans have multiple benefits, which include:
1. Keep control of ownership
One of the significant benefits of getting commercial real estate loans is that you retain full ownership over your property. Instead of selling to raise funds to maintain complete control. Don’t risk the future of your property, especially when commercial real estate loans help you keep that control.
2. Improve Cash Flow
Another significant advantage of commercial real estate loans is that it improved cash flow. With a little up-front payment, you can create a repayment schedule that is right for you. The kind of property will determine your repayment schedule. This flexibility helps keep your money longer, with this you can spend it where you see fit.
3. Financial planning
Commercial Real Estate Loan payment plans usually extend for a number of years, which allows investors to focus on other important business, matters such as sales, and monitoring overheads.
4. Property maintenance
All maintenance, security and the general upkeep of your premises would need to be paid for and undertaken by you. For instance, you will no longer complain about the broken pipes; you have to fix it yourself.
5. Lower interest rates
Commercial Real Estate Loan typically has lower interest rates than other unsecured borrowings. Selecting fixed monthly repayments means, you can use them in your forecasting and estate planning, enabling you to structure your company finance.