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Commercial Mortgages

Commercial Mortgages are term loans that are secured by tangible property such as business premises, shops, warehouses, workshops, factories, garages, hospitals, schools etc. These specialized commercial loans are designed for businesses, and imply that companies should show solid credibility and strong financials to qualify for receiving a substantial loan. The commercial mortgage borrower is usually a partnership, incorporated business, or limited company.

Commercial mortgage normally involves more paper work than residential mortgage. You must provide your business financials documentation from the last three years, including information on your income, business plans, rent rolls, etc. You may need to provide regular financial updates of your financial situation to the lender after you have received the loan.

Commercial mortgages have an unquestionable advantage over renting property. You do not only provide office space for your business, but you also build equity towards business property ownership. Retaining commercial property in your ownership gives you an opportunity to sublet the space, possibly gaining some extra income if needed. The interest payments on a commercial mortgage are tax-deductible. Also, commercial mortgage loans are generally assumable, which means that a qualified buyer can take over the terms of your existing loan without going through a difficult approval process, should you decide to sell the property while carrying the mortgage.

The major goal of Commercial Mortgages is to assist businesses in getting the necessary funding to purchase real estate. For beginners, commercial mortgages can be the best way to gain stability by buying land to construct a new building, or purchase an existing building for business like office buildings, apartment complexes, retail outlets etc. For growing businesses, it may serve as a perfect tool for financing business improvements, securing business premises expansion, residential and commercial investment, etc.

Commercial mortgage policies in the United States, their terms and conditions may vary depending on the region and market condition. Consider the maximum monthly mortgage repayment your business can afford. It is crucial to understand all aspects concerning the length of the loan, interest rates, and possible repayment schedules before you take out a commercial mortgage.

Commercial mortgage interest rates come in two general types: commercial fixed rates and commercial variable rates. Commercial fixed interest rates make a good choice for business owners who want to stabilize the monthly payment amount on the premises of continuously rising interest rates. With a fixed type of commercial mortgage, an interest rate is negotiated at the beginning by checking the risks involved and the current market rates, and this set rate doesn't change for the entire term, remaining in effect until the loan is fully amortized. It gives the advantage of predictability of your monthly expenses. The fixed interest rate won't rise if the market rate rises. The underside of it is that it won't fall in the case of the market rate reduction. If the rates fall significantly lower than your fixed rate, it is possible to refinance your mortgage.

In some cases your lender may add an ERC (Early Redemption Charge) clause to your contract. In case the borrower pays off the note prior to the end of the fixed rate period, the lender strives to compensate their loss of expected income by getting a one-time lump fee. Make sure you understand all the implications of the ERC if there is such a clause in your commercial mortgage contract.

Variable interest rate (or adjustable rate) mortgages present greater risk since borrowers cannot accurately budget for monthly payments. With a variable rate, the interest rate fluctuates during the payback period. The advantage of this type of commercial mortgage is in its lower initial interest rates in comparison with fixed rate loans. As long as the interest rate is decreasing, a variable rate is good for you. However, make sure you can afford the monthly payments should the market rates increase, as your payments will increase accordingly.

In some cases, commercial mortgage can start with fixed rates for three to five years, and then convert to variable rates for the remainder of the mortgage. This two-step type of loan is called hybrid loan.

There is also an "equal" payment and a final balloon payment type of mortgage, which requires borrowers to make equal monthly principal and interest payments for a relatively short period of time. After that you have to pay the balance in one payment, so called balloon payment. Lower monthly payments during the course of the mortgage allow you to keep more cash available for developing your business. However, the balloon payment is something you should be ready for, or you could try to settle for a new loan with better payment terms.

With interest-only payments and a final balloon payment type, your regular payments cover only interest, while the principal stays the same. For the period of first three to five years you make payments only towards the interest, which reduces your monthly payments. Once the interest-only period ends, however, your monthly payments will be considerably larger. At the end of the mortgage term you will be required to make a balloon payment to cover the entire principal and any remaining interest.

There are also some less common commercial mortgage lending types which you may find more attractive for your particular situation. For example, endowment mortgage is similar to an interest-only mortgage but funded with proceeds of an endowment. The additional security provided by the endowment, such as life insurance policies, personal savings accounts, personal equity plans and retirement plans is likely to result in a lower interest rate.

Consider the effects of commercial mortgage on your cash flow and assets beforehand. Remember that the lender has a legal claim over the property until the loan is fully repaid. If you default on the mortgage, the lender has the right to initiate foreclosure and take the property that was used as collateral. A default on the mortgage can be constituted by such events as failure to make payment, bankruptcy, insolvency or breaches of any obligations stated in the mortgage documents. Be very attentive to the clauses and wordings in the mortgage documents and always try to negotiate the parts that you feel may be unfavorable for you. For example, it pays to agree about receiving a written notice of any alleged default in advance, leaving you a reasonable amount of time to take measures to cure the default.

Like residential mortgages, commercial mortgages can be refinanced or re-mortgaged. Consider refinancing if you have held your current mortgage for over three years and would like a lower rate. Refinancing is usually quicker than the original mortgage process since you already have experience operating the property and the necessary documentation.