The Most Essential Differences to Consider Between Commercial and Residential Real Estate Loan Rates
Commercial and residential real estate loans seem to be the same at first glance. Both are financing solutions designed to provide access to real estate properties without the need for upfront payments, and both work based on the same principles of borrowing money from a financial institution like a bank, and then paying it back with interest. However, if you have no experience with commercial real estate, you might believe that commercial loans are the same as residential real estate loans – in which case, getting all the details settled would not require too much work. Unfortunately, this isn’t exactly so, and buying a commercial real estate property is a lot more difficult than the prospect of acquiring a new home for yourself or someone in your family.
First and foremost, it’s very important to consider the differences between the various details of the loans, with special emphasis on commercial real estate mortgage rates. The differences between mortgage rates, when comparing residential and commercial real estate, can be quite extensive. So if you want to get the best offers for your new commercial properties – whether as an investor or the owner of a new company – keeping track of mortgage rates is one of the most essential tasks. For that purpose, we have to point out that mortgage rates are between 50 and 100 base points higher than residential rates. This means you can expect to pay off the loan with an interest rate about 0.50% to 1% higher than that of a prime residential mortgage with a 30-year repayment period. This means even “A” quality borrowers will have to consider rates of up to 5% when considering a commercial real estate loan valued around the same as the residential mortgage loan required for a home or apartment valued at about the same level as the commercial properties they’d want to buy.
When considering USDA and SBA loans, the commercial mortgage rates required will be even higher. The typical value will fall into an interval of 2% and 2.5% higher than the typical 4% of a prime residential mortgage rate required for a 30-year home loan. The commercial mortgage rates of life insurance companies, however, will be more advantageous when compared to the rates available at most banks offering commercial loans, since life companies and conduits are typically associated with larger commercial mortgage loans, sometimes exceeding $3 million in their overall vlaue.
Finally, it’s good to consider whether the loan’s interest rate is fixed or floating. CMBS lenders and life companies are expected to provide loans with fixed rates for the entire duration of the loan, while most banks will offer commercial loans with fixed rates for the first 5 years. After that period, the rates will be recalculated according to the current market and new interest rates will apply. Recalculated commercial mortgage rates will typically remain fixed for an additional 5 years after the time when they were recalculated. All in all, however, you will find that the flexible options involved with getting the right mortgage rates for your commercial loan will be surprisingly beneficial for your business.