If you are trying to decide between various loans from different lenders, there are bound to be different terms to compare. When deciding what loan is going to be the best for you, understanding commercial real estate loan terms will help you plan far into the future.
Understanding the various conditions of your real estate loan will not only alleviate a lot of the stress of planning for repayment and usage of your loan, but it will also help you choose the options that are going to be the best for your specific real estate needs. While each loan is going to have unique factors and terms, there are some basic things to understand about commercial real estate loan terms.
The first thing to understand is that the condition of the borrower will greatly impact the terms of the loan. This is especially true for more traditional lenders. As a general rule, if the borrower presents a higher level of risk to the lender, then the commercial real estate loan terms will be much more in the interest of the lender. Such issues could be less than stellar credit, or not much collateral to bring to the table to secure the loan. It only makes sense. Lenders want to make sure that the terms are in their favor so that they are able to gather some sort of return on their investment with the loan. A lack of any sort of record for the repayment of outstanding debt could also affect the terms, as lenders do not know what to expect from potential borrowers, in this case.
Another aspect of commercial real estate loan terms that can greatly impact a borrower and future plans is the length of the loan itself. While there are many options for extremely short terms loans that are designed for flipping properties or quick influxes of cash to generate massive returns on revenue, the majority of loans are geared toward longer lengths, although not as long as a residential mortgage. Usually they can be as short as 5 years and as long as 30, but they typically fall in the 10 to 20-year range. But the key to understanding your loan here is to understand how it is amortized.
Unlike residential loans, many commercial real estate loan terms will state an amortization period of longer than the actual repayment term of the loan. Typically, a commercial loan will have a standard payment period for the first portion of the loan and then end with a large payment that will take care of the balance of the loan, often called a balloon payment. Let’s say, for example, that your loan is for 10 years, but is amortized over a term of 20 years. This means that you will make payments for 10 years as if you were going to be holding the loan for 20 years (in terms of the interest and amortization). However, after the 10-year term is up, you will be responsible for the entire remaining balance in one payment.
How are commercial real estate loan terms beneficial to borrowers?
Even though they might seem daunting, commercial real estate loan terms allow borrowers to take leaps that they would not otherwise be able to. If used correctly, these loans will help borrowers to acquire properties and turn them into income generating investments.
Level 4 Funding LLC Private Hard Money Lender
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Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
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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.