Refinancing A Commercial Business Mortgage
Commercial real estate owners may consider refinancing their property for one reason of the other. It may be with the aim of extending a term of the mortgage, more so if they have hard cash loan or a bridge loan that need paying off or will be up for renewal soon. It also could be that the commercial real estate owners have real estate with a sizeable value that exceeds their mortgage balance and want to tap in their property’s equity for purposes of growing and expanding their business. Or perhaps, it could be that the commercial real estate owners are keen on reducing a financial strain their company is facing because of a withstanding mortgage.
It is thus, evident that the reasons vary. However, the refinance is the common denominator hence the need to consider picking the right commercial mortgage refinancing option.
What Is A Commercial Mortgage?
A commercial mortgage is a business loan that has a business’s property given as security (collateral). Some of the properties that are ideal for requesting a commercial mortgage include warehouses, retail stores, industrial buildings, office building, and rental properties such as apartment buildings. The credit and finance lending industry are different mortgage lenders that offer various types of mortgages ranging from those with a short term of around 1 to 2 years and loans that have a term of 25 – 30 years.
How Does The Loan Work?
First, the lender will evaluate the credit score of the real estate owner requesting the commercial mortgage and will assess the value of the property to determine if it can stand as collateral. The creditor will also evaluate the business’ revenue and cash flow. The process of underwriting a commercial loan differs from one lender to the other. The same is also evident in how much they are willing to provide as well as how they structure the commercial loans. In most cases, most long-term commercial mortgages have terms of between 10 and 25 years. But then again, some financing options can offer mortgage loans with a tenure that is anywhere between a year and ten years.
Why Would A Business Refinance A Commercial Mortgage?
- Lower Rates: A business can save money by leveraging the lower rates on their mortgage. It is something worth considering if you have an adjustable rate mortgage that market rates take a dip. You will have the chance to lessen the burden you have with your current mortgage by refinancing it with another at a lower rate. However, this should be done with caution because refinancing the mortgage also comes at a cost and the fees associated with it can outweigh the objective of saving some money.
- Longer Terms: Extending a mortgage’s term can be a move that sees you significantly reduce its monthly payments and less the financial strain placed on your commercial business, especially if it has little cash-flow. Lengthening the term from 5 years to around 20 or more years will dramatically reduce the monthly mortgage payments.
- Avoiding Balloon: The structuring or a mortgage is designed to have you paying smaller monthly payments during the loan’s term and then expecting you pay the remaining amount in full when it is due. Such a plan only places a significant financial burden on your business. To avoid failing to honor the payments, most commercial real estate owners opt to refinance their mortgages before the substantial (balloon) payment is due.
- Cash Out Refinance: Getting a cash out refinance loan is one means that real estate owner that tap into the property’s equity if its commercial value is less than the current mortgage balance. A cash-out loan is an option worth considering if a property owner is looking to expand the business or for other working capital uses such as tenant improvements.
Types Of Commercial Mortgages
Fixed-rate Commercial Mortgages:
It is a loan secured by the business property but has a fixed interest rate, and that means that the monthly payments are the same throughout the loan’s term. Fixed-rate commercial mortgages are the best choice for businesses because they allow the company and owner to plan the finances for the period of the loan’s tenure to be able to repay it before term-end.
It is different from the fixed-rate mortgage. It can also be called an ARM or a variable rate mortgage. As the name suggests, it is a loan with interest rates that are subject to change based upon an index. It has its advantages and drawbacks. The plus side of this type of loan is that the rates of the mortgage decrease as they general interest rates take a dip. But the opposite also stands; an increase in mortgage payments when the interest rates start to soar.
Interest Only Mortgages:
It is a mortgage plan that sees the borrower pay interest on the loan for a predetermined period while the principal stays the same. The commercial real estate owner is, however, expected to repay the principal in full at the end of the mortgage loan’s term. While the payments made are limited to the predetermined period, which is advantages to the commercial property owner, none of the payments go directly towards repaying the principal amount. As such, the interest-only mortgage will see the borrower faced with a substantial principal that is due at the end of the loan’s term.
Balloon Payment Mortgages:
Fully amortizing this type of mortgage is rather hard and that means that the commercial real estate owner will be left with a significant amount to pay when the mortgage loan’s term is due. The lenders offer adjustable rates and fixed-rates on this loans. A notable upside of the balloon payment mortgage options is it helps defer some of the costs of borrowing to a later date, and this can ease the business owner’s debt service. The downside is there is a significant payment due when the term of the loan comes to an end.
Commercial Mortgage Refinancing Options
SBA Mortgage Refinancing
It is refinancing done through an enhancement program from the Small Business Administration (SBA) and is one that most conventional lenders, such as the credit unions, community lenders and banks prefer when providing commercial mortgage refinancing. In as much as the loan secures the property, the lender faces a lesser risk because the SBA’s enhancement covers a large percentage of the loan if the borrower fails to repay the loan.
Bank Commercial Mortgages
For most commercial real estate owners that want to reduce their monthly mortgage payments or are looking to refinance into a more favorable facility, this is the loan option that they find ideal. The banks offer mortgages with fantastic rates and with long tenures that can be up to 30 years.
They are the type of mortgage loans offered by individuals and private investment groups. Such lenders are not bound by the many restrictions the conventional mortgage lenders face. Therefore, these private commercial real estate lenders can offer innovative and aggressive financing options. Some of the loans they offer include cash-out refinancing, bridge loans, term loans as well as other kinds of commercial real estate financing solutions.
The number of commercial real estate mortgage loan lenders is enormous thus availing numerous options for real estate investors looking to refinance their mortgages. The lenders offer different loan structures, terms, and rates. Given the many players in the mortgage refinancing space, finding the right creditor can prove to be tricky. If you are finding it hard to know where to start and desire to make the best choice, then reach out to any of our financing experts. They will advise and guide you accordingly.
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