- September 13, 2017
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Have you thought about purchasing commercial real estate? If so, you will likely need to do some research on how best to acquire a loan. There are multiple types of commercial loans, and like a house mortgage, there are variations to the terms. SVN | Hintze recently published a blog post called “3 Main Components of a Commercial Real Estate Loan.” We thought it was very well written and worth sharing with you. The original article goes into some detail about loan types, interest rates and closing fees. Below is an excerpt from that article. If you like the teaser, we would suggest clicking the link at the end of this post. That way, you can read the full version! Let us know what you think.
When purchasing a commercial real estate investment it’s critically important to obtain optimal financing. Not only will finding the right lender and loan save you money, it will ensure that you achieve your long-term business goals and provide the financial flexibility needed to grow your business and returns.
So, how do you ensure that you lock yourself into the best commercial real estate loan? It involves doing your research, shopping around and comparing lender offers, and determining what makes the most financial sense for your situation. As part of that research, it’s important to start at the heart of CRE financing…and that means understanding the three components of a commercial real estate loan.
The nuts and bolts of a commercial real estate loan
In order to get the best possible financing from a lender, you will first need to understand the three major parts of a commercial real estate loan.
The loan term is another way of saying repayment term and schedule. Commercial real estate loans are offered with two types of terms: (i) Intermediate-term loans which last three (3) years or less, and (ii) Long-term loans which last anywhere from five (5) to 20 years.
These two term lengths are typically offered in two different types of commercial real estate loans: (i) an Amortized loan, and (ii) a Balloon loan.
- Amortized Loan: This type of loan is typically a long-term loan and is the kind we are all used to seeing in residential mortgages. It involves the borrower repaying the full amount of the loan (plus interest) in fixed installments over a set period of time. Ex. If you borrowed $100,000 at 2% interest for 20 years you would pay $283.33 each month until the end of the term. ($100,000 + 2% interest [$2,000] = $102,000 / 240 months)
- Balloon Loan: These types of loans are typically offered as an intermediate-term loan with terms of 5 to 7 years, sometimes up to 10. The key difference between a balloon loan and an amortized loan is that a balloon loan requires the borrower to pay off the remaining principal at the end of the term in one lump payment. While this loan still involves fixed installments, those installments aren’t set up to repay the entire loan amount. Instead those fixed payments are calculated as if it was a 20-30 year mortgage instead of a 5 to 7 year. This means at the end of the loan term the last payment is….