Many people equate a commercial loan to a residential loan but they are nothing alike. Commercial loans 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 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 the 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 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, than 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
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