What You Need To Know About Commercial Refinance Loans
Refinancing a Commercial Business Mortgage
There are numerous reasons why real estate owners could think of refinancing their property. This could be to extend a mortgage term, especially if the real estate owners have a bridge loan requiring payoff, hard cash, or the property will be up for renewal in the near future. Another reason may be the fact that the owners could have a property with a higher value than their mortgage balance and would wish to tap into the equity of the property to grow and expand their businesses. Again, the real estate owners could wish to reduce the financial strain facing their company as a result of the mortgage. With these varying reasons, refinancing is common in all, and therefore, a real estate owner must get the ideal commercial mortgage refinancing option that best suits them. Colorado Mortgage Pros sheds more light about the commercial refinance loans below.
Commercial Mortgage Definition
A commercial mortgage, just as it sounds, is a business loan that has the property of the business offered as collateral. Some of the ideal properties for requesting commercial mortgage are retail stores, office building, apartment buildings, industrial buildings, and warehouses, among others. The lending and credit industry are the various mortgage offers that provide different mortgage loans ranging from the short to the long term.
How Commercial Refinance Loan Works
The first thing is where the lender evaluates the credit score of the borrower requesting the commercial mortgage. The lender will also evaluate and assess the property’s value and find out if it qualifies as a security. The lender will also assess the cash flow and revenue of the business. The process involved in underwriting the loan will differ from one lender to the other, and the same extends to how much they will be willing to offer. The structure of the commercial loans also differs across lenders, but most long-term mortgages have terms of between 10-25 years.
Why Would a Business Refinance The Commercial Mortgage?
Longer Terms- Extended mortgage terms means that there will be reduced monthly payments and consequently less stress on the commercial business. This is beneficial to businesses with low cash flows and, therefore, lengthening the terms will reduce the monthly mortgage payments to a great extent.
Lower Rates- A commercial business can be in a position to save money by taking advantage of the reduced rates on their mortgage. Businesses, especially those with adjustable mortgage rates that rates of the market take a dip. The businesses will stand a chance of reducing the burden with the current mortgage by refinancing it with another one and at a lower rate. Factor in the fees and costs associated with the mortgage refinance process to ensure the move is worth the costs.
Cash out Refinance- By acquiring the cash out refinance loans; the owners can tap into the equity of the property if its commercial value does not exceed the current mortgage balance. This is an ideal option especially to owners who wish to expand their businesses or for other purposes like tenant improvements.
Avoiding Balloon- The mortgage is structured in a way that you pay smaller payments each month during the lifetime of the loan and then pay the remaining amount in full when due. This structure can place financial stress on the business. To avoid failing to make these payments, most borrowers tend to refinance their mortgage before the balloon payment is due.
Types of Commercial Mortgages
The Fixed-rate Commercial Mortgage
In this loan type, the business property secures the loan, which has a fixed interest rate. This implies that the payments made each month are similar throughout the term of the loan. This is popular to many businesses as the borrowers can plan the finances beforehand to ensure the loan is repaid before the term-end.
Adjustable-Rate Mortgages (ARM)
As the name suggests, the variable rate mortgage is a loan whose interest rates are subject to change based on an index. This loan has both benefits and downsides. The benefit is that the mortgage rates decrease when the general interests take a dip. However, the opposite is also the same; an increase in the interest rates means an increase in the mortgage payments.
Balloon Payment Mortgages
Fully repaying this mortgage type is quite hard, and this implies the business owners will be left with a high amount to pay when the term of the mortgage is due. Lenders normally provide fixed-rates and adjustable rates on this type of loan. The main benefit of this option is that it aids in deferring some of the borrowing costs to a later date and thus easing the owner’s debt service. The drawback is that there is a higher payment left when the loan’s term ends.
Interest Only Mortgages
In this mortgage loan type, the borrower will normally pay the loan’s interest for a predetermined time while the principle remains the same. However, the borrower will be expected to repay the principal in full when the term of the mortgage loan ends. The payments made will be limited during the predetermined time, which is a benefit to the real estate owners. However, these payments are only on the interest and do not repay the principal amount. This means that this mortgage loan will be left with a huge principal due when the loan’s term comes to an end.
Commercial Mortgage Refinancing Options
SBA Mortgage Refinancing
This is a refinancing type that is done via an enhancement plan from the Small Business Administration. It is one of the most conventional lenders, like community lenders, banks, and credit unions opt when offering commercial mortgage refinancing. In this type, the loan secures the property, and the lender also faces a reduced risk since the SBA’s enhancement helps in covering a large percentage of the loan lest the borrower fails to honor the loan.
Bank Commercial Mortgages
Banks normally provide mortgages with great rates and long tenures, which can be over 25 years. This is, therefore, an ideal option for commercial real estate owners looking to refinance into a much better facility or reducing the monthly mortgage payments.
Just as the name suggests, these mortgage loans are given by private investment groups and individuals. These lenders are not bound by the numerous restrictions faced by conventional mortgage lenders. Therefore, private mortgage lenders can offer aggressive and innovative financing options. Some loans offered include bridge loans, term loans, cash-out refinancing, and other forms.
There are numerous commercial real estate mortgage loan lenders, thus numerous options for investors looking to refinance their mortgages. The numerous lenders come with numerous loan structures, rates, and terms, therefore, making it tricky to find the right creditor. If you are in the same predicament, Colorado Mortgage Pros are always on standby, ready to help you make the right choice.