June 13, 2019 •Leah Driver
If you’ve realized your rent is too high, you’ve outgrown your office space, or you have a balloon payment coming up, you’re probably in the market for a commercial mortgage. It’s exciting, but it can also be stressful. The more you know about commercial real estate loans, the more likely you are to find the best option for your business.
Balloon Payments
When we hear “mortgage,” we generally think of purchasing a home. A commercial real estate loan is similar, except there are generally two types of terms:
- Intermediate-term loans (5 years or less) that end with a balloon payment
- Long-term loans that last from 5 – 20 years.
What is a balloon payment? After you’ve made the monthly payments for the duration of your loan, the remaining balance is due in a single payment. Typically, commercial mortgages with a balloon payment charge a lower interest rate than longer term loans. This means you need to consider which is best for your business. Is it better to make lower payments today, knowing that you’ll have a balloon payment, or is it better to make equal loan payments over an extended period of time? There’s no one correct answer, as every business’ needs are different.
Interest Rate and Fees
Another important consideration is the interest rate you’ll be charged. As with most business loans, your rate can vary based on the type of business, its financial health, and your creditworthiness. In addition, the higher your LTV (loan-to-value), the higher your rate is likely to be.
A lower LTV typically requires a higher down payment, leading to another major consideration – how much money do you have available for a down payment? This leads to more questions – if you have the money, can it be used more profitably elsewhere? How much do you need to put down to receive a lower rate? Again, an experienced lender can help determine which is best for you.
Like residential mortgages, commercial mortgage loans involve costs such as property appraisal fees, legal expenses, survey fees, loan application charges, and so on. Some fees can be bundled into the loan amount, but keep in mind this will lower the LTV. In addition to up-front fees, some loans involve a prepayment penalty. This is a clause that states a penalty will be charged if the mortgage is paid down, or paid off, early. This penalty is typically based on a percentage of your remaining balance, or a certain number of months’ worth of interest.
Before closing your mortgage, be sure you understand the fees and penalties you’re being charged and plan accordingly. Even a small fee can have a large impact on your total borrowing cost. You should also look at your current business plans and make any necessary changes to accommodate the mortgage, and be sure it’s feasible.
If you have any questions about the commercial mortgage process, don’t hesitate to contact one of our Relationship Managers. Our team has over 200 years of business lending experience, and is happy to give you advice, no strings attached.
Schedule a Conversation
f you have any questions about the commercial mortgage process, don’t hesitate to contact one of our Relationship Managers. Our team has over 200 years of business lending experience, and is happy to give you advice, no strings attached.
Additional Resources
- Preparing to Apply for a Small Business Loan
- Financing Options for Small Business (Educational Course from the SBA)
- Our Favorite Commercial Mortgage Advice for Small Business Owners
The views, information, or opinions expressed in this article are solely those of the author and do not necessarily represent the views of Citizens State Bank and its affiliates, and Citizens State Bank is not responsible for and does not verify the accuracy of any information contained in this article or items hyperlinked within. This is for informational purposes and is no way intended to provide legal advice.