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Choosing a Commercial Real Estate Loan Option
Author David Schneider | Feb 03,2008
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There are many commercial mortgages from which to choose. So many, in fact, that knowing which one to pick can be hard. Each financing option has its own pros and cons. Talking with a broker can help you sort out all the options. However, it’s nice to have an idea of the best loan for you before you visit a broker.
Commercial Real Estate Loan Option -- Adjustable Rate Mortgages
Adjustable rate mortgages (ARM) are real estate loans that start at one interest rate. Over time, the rate will change depending on interest rate fluctuations. Often the interest rate will stay constant for a set period, several years usually, before adjusting to the prevailing rates. It will be no surprise when the rate is set to change.
One advantage to adjustable rate mortgages is that the interest rate is often lower than the rate for fixed mortgages, at least initially. This allows you to have a lower monthly payment or to qualify for a higher value loan, or both.
The downside is that when the initial interest rate period is over, the interest rate could become higher, in some cases much higher. It is possible with some loans, however, to refinance instead of pay the higher interest rate.
Commercial Real Estate Loan Option -- Fixed Rate Mortgages
A fixed rate mortgage is much simpler than an adjustable rate mortgage. When you take out the real estate loan, the terms and conditions, including the interest rate, remain fixed for the life of the loan. Regardless of interest rate fluctuations in the market, your interest rate will not change. This will allow you to plan your mortgage expenses without having to worry about changes to the interest rate.
The downside to fixed rate mortgages is that the interest rate is often a higher than adjustable mortgages. This will result in a higher monthly payment and may mean you have to take out a smaller loan. If you value stability or are expecting interest rates to rise to unacceptable levels in the next few years, choose a fixed rate mortgage over an adjustable rate.
Commercial Real Estate Loan Option -- Hard Money Loans
For some reason, the bank doesn’t want to offer you a loan. What are you supposed to do now? You don’t have to stop your project. Instead, turn to private lenders for what a hard money loan.
This loan is based on the value or projected value of your real estate. It is a riskier loan. For the privilege, you’ll have to pay a higher interest rate. It just might be worth it to get the construction started. |
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