Understanding Commercial Mortgages and Interest Rates

Commercial Building

Commercial mortgage interest rates tend to be higher than residential mortgage interest rates, and most commonly, the terms of a commercial mortgage are different than the terms of a residential mortgage.

Commercial Mortgages Explained

A commercial mortgage is a mortgage used to buy a commercial property as opposed to a residential property. A commercial property may be a multi-family housing unit, such as apartment buildings or condos. It may be an office building, a hotel, a restaurant, or a retail building. Any type of property that is owned for commercial purposes and zoned for commercial or multi-family housing can be a commercial building and can be purchased with a commercial mortgage.

Commercial mortgages are usually obtained by companies, rather than by individuals. This means that a legal partnership, limited liability company, S-corp or C-corp is most often the entity whose name the mortgage is in. While sole proprietors can sometimes take a commercial mortgage if they buy a commercial building, this is not as common.

Residential vs Commercial Mortgage Interest Rates

Commercial mortgage interest rates are usually higher than the interest rates for a residential mortgage. The higher rates result from several factors:

  • It can be harder for banks to gauge the creditworthiness of company than of a person, since companies -especially new ones- may not have as long of a credit history as people do.
  • In many types of corporate structure, such as LLCs, S-Corps and C-corps, only the company is responsible for the mortgage debt. That means that if the company doesn't have assets, the bank doesn't really have anyone to sue to get their money back. As such, if the commercial entity defaults on the mortgage, the bank can foreclose only and can't get a deficiency judgment if the property doesn't sell for the full amount remaining on the mortgage
  • Most commercial mortgages are paid for by the business done with the property. For example, if a company takes a commercial mortgage to build an apartment building, that company may be dependent on the rent from the apartment to pay the mortgage- this is different, and sometimes riskier, than an individual who buys a house and who makes the mortgage payments with his paycheck and verifiable income. This is especially risky for the bank if the mortgage is given to a newer company or to a company without a lot of assets.

Commercial Mortgage Details

Because of the differences between a residential mortgage and a commercial mortgage, most often, the commercial mortgage is granted based on the expected commercial value of the property, as opposed to based on the assets and income of the entity taking the mortgage.

The most common type of mortgage is a fixed rate mortgage with a balloon payment, so the interest rate on a particular loan does not adjust. The payment is based on the interest rate and the amount required to pay off the mortgage over a long term, which is commonly 30 years. However, although the payments are set to pay off the mortgage in 30 years, at some point earlier in the life of the loan a balloon payment (a payment for the rest of the loan) comes due. This means the company will have to refinance and, at that time, prove its continued creditworthiness.

Finding Commercial Mortgage Rates

You can find the current interest rates for commercial mortgages at several websites online including Realty Rates.com. Like any other type of interest rate, rates fluctuate with changing market conditions, as well as with the actions taken by the Federal Reserve and the demand for loans.

Rates may also vary depending on the type of business you wish to open with the commercial mortgage, so make sure to check with your mortgage company or consult with a commercial mortgage real estate broker to find out interest rates when you set your budget and plan to buy.

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Understanding Commercial Mortgages and Interest Rates