It is necessary to compare commercial mortgages in order to determine which one will be most suitable for your needs. Make sure to work with a lender that has an excellent reputation.
As you are browsing over information about business loans and how to apply for one, then you might have stumbled upon the fact that mortgage is among the most applied for when it comes to commercial loans. A commercial mortgage loan uses any physical property, whether a house, a lot, or car, as collateral to a business loan. The conditions are similar to a home loan where the lender reserves the right to pull the titles of the property if the borrower fails to settle the payment on the scheduled dates. A commercial mortgage loan is oftentimes used to buy a place to establish a business or fund particular business operations. The interest rates in commercial mortgage loans are also similar to that of home loans but the borrower has the option to apply for a short-term or long-term loan.
Types of Commercial Mortgage Loans
The following are the types of commercial mortgage loans:
- Adjustable commercial mortgage – Similar to adjustable home loans, an adjustable commercial mortgage has varied interest rates. It depends on the lender’s assessment of the value of the borrower’s collaterals. The borrower takes the possibility of moderate risk because the interest rate changes from time to time depending on the current market value.
- Fixed-rate commercial mortgage – the interest rate is fixed for the entire tenure of the loan which may vary from 5 to 20 years.
- Interest-only mortgage – In this type of loan, the borrower needs to present documents to the lender proving that the business has consistent income for the entire tenure. If that is the case, then the lender can grant interest-only mortgage where the borrower can pay low interest on the first years and then settle the amount of the mortgage.
- Commercial second mortgage – a second mortgage may be applied if the business owner needs fast cash. This can be done through investing the first property to the lender as collateral. The second mortgage may be released with a fixed rate or an interest-only term with tenure of 2 to 20 years.
In the case of sole proprietorship, the lender might require the borrower to submit a co-borrower as security measure in case the owner is not able to settle the amount on the scheduled dates or in the event of bankruptcy. The mortgage lender conducts credit and physical investigation of the business and requires the borrower to submit the business plan including details of how the income will be generated. This is a long process because the security of those lending institutions is at stake. Ideally, lenders cannot entertain properties as payment for the loan because the foreclosure process takes a lot of effort and time before it can be sold and converted into money. With this, financial institutions like banks and lending companies make use of interests on top of the amount of mortgage.
There are a lot of factors to consider before applying for a commercial mortgage loan. You should be able to determine whether the purpose for which the fund will be allocated is worthwhile of the interest that will be paid to the lender.