Understanding the Repayment Terms of Your Commercial Mortgage Loan

Borrowing capital from a bank or lender requires repayment terms that can sometimes seem overwhelming. However, with a clear understanding and a plan, you can be prepared to meet the terms of your Arizona commercial mortgage loan.

Because these types of loans aren’t backed by Fannie Mae, or other government entities with residential real estate, many commercial lenders demand higher interest rates to off set the risk of loss. Credit, collateral and repayment ability is all taken into account on this type of loan very early on in the application review process. When it comes specifically to the loan repayment terms, it’s important to pay close attention.

A balloon repayment is often required with commercial mortgage loans via a traditional bank, that makes the terms of the repayment due earlier than the state due date. The balloon repayment refers to the fact that you will be required to pay interest and principal on the mortgage as documented for the first portion of the loan (which could be anywhere from 3 to 10 years). After that, the balance of the repayment terms it due in one lump sum.

The good news is, at the end of the initial repayment timeframe, the borrower can re-qualify or refinance your loan. More good news: while banks typically require this balloon payment procedure, alternative types of lenders are more willing to approve commercial mortgage loans without the stiff balloon repayment. Instead these loans may incur a higher interest rate but they allow the long-term repayment in the way of a fixed-term for around 30 years.

Is The Balloon Repayment Option Right For Me?

That depends on two factors: your business’s cash flow and your ability to save. If you have a solid business and are able to easily save money towards paying off this loan in one big final payment after a few years without stressing yourself out too much in the process, then go for it! After making that final payment, you’ll have the satisfaction of owning the building or property outright — what a feeling! However, if you feel the business or personal finances might be stretched to the max to meet the balloon payment, see if building in an option to refinance at that time is possible or opt for a more traditional repayment schedule with a non-bank lender.

Based on the terms of a bank loan’s balloon repayment, consider alternative lender options for a more traditional repayment structure.

Even though you may incur a slightly higher interest rate charge, going with a non-bend lender for your commercial mortgage loan may serve you better over the long run if you think you may struggle to repay the lump sum of the balloon repayment structure. Weigh your options and move ahead with what is best for you. In the long run, the slightly higher interest rate may save you the stress of a larger payment after a few short years into the loan.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.