Much like residential mortgage rates, commercial real estate interest rates have a great deal of variety depending on a number of factors. Knowing how interest rates are calculated, and what can impact them, will help you to make informed decisions as a borrower.
Although each lender is different, there are some common factors that go into determining commercial real estate interest rates.
One of the biggest questions that a borrower must ask when consulting with a lender is whether an interest rate is fixed or variable. A fixed interest rate does not change from month to month. It remains the same for the entire life of the loan. This will remain the case, even if the interest rate falls below the interest rate that was agreed upon. Commercial real estate interest rates that are fixed are very difficult to acquire because the lender wants to optimize their potential profit as well. Because of the size of commercial loans, lenders will often only extend a fixed rate term to a long-standing client or a borrower that is extremely well qualified in the credit area.
A variable rate loan can rise or fall past the initial interest rate. These types of commercial real estate interest rates are by far the most common. They can also cause a great deal of anxiety amongst borrowers, as monthly payments rise and fall based on market factors, instead of anything in the control of the borrower. If a borrower does have a loan that has a variable interest rate, it is crucial to understand how the interest rate is determined and what the borrower can do to affect it. In most cases, there is nothing that the borrower can do, as the interest rate is based on the prime rate that is set by the federal government. The government sets this rate based on the strength and speed of the national economy as a whole.
A borrower does have the potential to get incredibly lucky and have the interest rate drop during the term of the commercial loan. Having such a windfall has the potential to save a borrower several thousand dollars. However, this should not only not be planned for, but it should be assumed that it is not going to be the case. It is far more likely that commercial real estate interest rates will rise, even if just slightly.
What determines commercial real estate interest rates?
First and foremost, interest rates are based on the prime rate. With this as a base, lenders are free to add “points” to the interest rate. These points translate directly to interest rate percentage point increases. Depending on the creditworthiness of the borrower, or the amount of collateral and security that they are willing to put down, the number of points can vary. It is important to remember, however, that lenders want borrowers to choose them. Because of this, it is not very likely that the interest rates will be that extraordinary or unrealistic. Commercial real estate interest rates are very dependent on the qualifications of the borrower.
Level 4 Funding LLC Private Hard Money Lender
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Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
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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.