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3 ways commercial loans are different than mortgages

On Behalf of | May 9, 2022 | Commercial Leases

Many people choose to buy real estate rather than lease it so that their monthly payments lead to accrued equity. Businesses may decide to buy their premises for the same reason. The facilities that they purchase could be a major contributing factor to the business’s overall value.

Especially when someone has never purchased commercial real estate before, they may think that the process is just like a standard mortgage for a piece of residential real estate. There are multiple ways that commercial real estate loans are different than mortgages.

How much you can finance will be different

When you buy a residential property, you may be able to finance up to 100% of the property’s value. That won’t be an option with commercial real estate. Banks will typically finance no more than 80% of the price, and sometimes as little as 65%.

The duration of the loan will be different

Most mortgages last for 30 years, although some people sign 15-year mortgages. Commercial real estate loans often aren’t longer than 20 years, and many times, the repayment period lasts five years or even less.

 Interest rates will be higher

The interest rate a lender charges on a loan reflects the rate they pay to borrow money and the risk that they take. Many businesses fail, which means commercial loans can be more of a risk than mortgages. People will often do anything they can to keep their homes but may have less of a commitment to a commercial property. Banks will also charge more in interest, given the increased risk.

Learning about the differences between commercial real estate loans and residential mortgages can help you prepare to upgrade your business facilities to a property that you own.