Commercial Real Estate Mortgage Loans
Commercial real estate loans are usually underwritten based entirely on the value/prospects of the property being mortgage or refinanced, rather than on the credit qualities of the borrower(s). To protect themselves from forfeiture due to bankruptcy, lenders usually require that the property be owned by a single asset entity (a corporation or LLC created specifically and only to own the property being used as collateral) that is "bankruptcy remote"; this means that if the borrower defaults, the lender can foreclose on the property even if the borrower goes into bankruptcy. In a standard residential loans, lenders cannot easily sell a foreclosed property involved in a still-pending bankruptcy case.
How Do Commercial Property Loans Work?
The length of commercial loans can vary from 5 to 30 years. Commercial mortgage terms consist of two factors: the length of time allowed until a balloon payment is required and the amortization period. Most commercial mortgage loans allow borrowers to make monthly payments based on a 20-30 year timeframe, but require a balloon (or total) payment after a shorter time period. Many borrowers get refinance mortgage loans at the time the balloon payment is due.
Most commercial real estate loans are non-recourse, meaning that, should the borrower default, the lender can seize the commercial property (the collateral) but cannot pursue the borrower for any further deficiency; in other words, the borrower's assets, other than the property used to secure the loan, are safe from lenders. However, a mortgage lender broker requires borrowers to accept a general obligation, meaning that the borrower must still pay the debt in full if foreclosure of the mortgaged commercial property does not render complete restitution.
How Do Commercial Real Estate Mortgage Loan Rates Work?
Most commercial mortgage loans are a fixed rate home loan, in which the applied interest rate remains the same for a fixed period (usually the life of the loan). This means that the commercial mortgage interest rates, and thus the commercial mortgage loan repayments, do not fluctuate with the market. Fixed-rate commercial lender loans are based on stable markers such as treasuries, corporate bonds, swaps, or Commercial Mortgage Backed Securities (CMBS) rates.
Less often, commercial real estate loans are capped or variable. A capped loan is an index-based loan in which the interest rate can drop but cannot rise over a set level (the "cap") for a certain period of time. In a variable-rate loan, the interest rate changes in keeping with an index (e.g. – the LIBOR rate for Libor Loans); this is an advantage when market interest rates drop but a disadvantage when interest rates rise. Variable-rate loans often offer a lower introductory interest rate than fixed-rate loans, followed by a rate increase when the introductory period expires.
Can Secondary Loans Be Taken Out on a Mortgaged Commercial Property?
Additional mortgage loans (known as "second commercial mortgages") can be taken out on a commercial property secured behind the first lien. These second mortgages are subsidiary to the first mortgage and carry a higher interest rate.
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