Understanding a Commercial Loan Refinance

Commercial Loan Refinance

It is clear that refinancing is one of the best ways that an individual can meet borrowing requirements and other investment objectives. But don’t become too excited yet! The refinancing opportunity is not extended to every business loan since there are some business loans that it is not possible to refinance them. But all in all this service helps companies to carry the baggage of several loans easily.

Reasons to necessitate refinancing

A commercial real estate or business owner can choose to refinance a particular property for various reasons. Some may see that their existing mortgage is causing a lot of debt strain to their operations and business and thus choose to refinance the property to reduce such strain. Others may want to support their business operations through the real estate’s equity when they see that the value of the commercial property significantly surpasses the prevailing mortgage balance. While others still will simply be seeking to extend a commercial mortgage that has a shorter payoff or renewal period.

“Refinancing is a viable mortgage option for businesses to explore.”

What entails a commercial mortgage?

Any business loan that you simply use a business property to secure it can be categorized as a commercial mortgage. Some of the properties that a business person can utilize to secure a commercial mortgage entail;

  • Business real estate for the owner-user such as industrial buildings, warehouses, factories, retail store buildings and office buildings.
  • Investment and development real estate like apartment amongst other rental buildings.
  • Depending on the loan period, whether long as 25-30 years or short as 1-2 years, a mortgage lender will offer a diverse range of mortgage loans.

What entails a mortgage refinancing?

The procedure of changing the property loan or lender is what can be termed as refinancing a particular investment loan or home loan. You can cater to your current circumstances using the new loan product as well as enjoy additional benefits that another lender or current lender provides using the refinancing facility.

How a commercial mortgage works

As a first step in the commercial mortgage provision, a commercial lender will analyze the real estate value of the collateral asset, examine the revenue and cash flows that a real estate generates and even check whether the property owner has the right credit standing.

While most commercial lenders provide long-term mortgage loans that range between 10-25 years, others offer fast commercial mortgage options that can range between 1-10 years.

In essence, the financing a lender is willing to provide, the structure of the loans and the underwriting of those loans will vary from lender to lender.

Why a business would choose to refinance a commercial mortgage

  • Lengthen loan terms: monthly mortgage payments can tremendously reduce when you lengthen the mortgage terms. For instance, monthly payments will be reduced, and the business’s cash flow strain relieved when the mortgage terms are extended from 3 to 25 years.
  • Enjoy lower rates: Businesses can save money on their mortgage costs through taking advantage of the lower rates. In case the market rates drop, you can save some money when you refinance the existing mortgage into one that has a lower rate as long as the mortgage has an adjustable rate.
  • Avoid balloon payments: small termly monthly payments and payment of the remaining amount at the end of the term usually leaves a particular business with enormous payment burden. Rather than wait for the balloon payments fall due and get stuck, many commercial property owners choose to refinance their mortgage.
  • Cash-out: cash out refinance loan can tap the equity of a property when the property’s value exceeds the mortgage balance. Commercial property owners can utilize this facility for supporting working capital uses, built-out in a property and other tenant improvements.

Kinds of commercial mortgages

Fixed rate: the interest rate through the loan amortization period remains constant for this loan that a commercial real estate secures it. The monthly payment that a property owner will be required to settle is known due to the fixed nature of the interest rate. Since it enables a commercial property owner or business to plan the long-term use of the finances, such an interest-rate structure is usually preferable.

Variable rate mortgage: based on an index, interest rates in this kind of mortgages usually adjust accordingly. The good side with ARM (adjustable-rate mortgages) is that a property’s mortgage rates will decrease when the general interest rates decline. However, the negative side comes in when the mortgage payments and interest rates escalate due to a rise in the interest rates.

Interest rate mortgage: in this commercial mortgage set up, only the interest for a specific period will have to be catered for by each real estate owner. The principal amount will remain unchanged until the mortgage duration period is over for it to be paid. It is advantageous in that the payments that a real estate owner will make will only be for a limited period. But since no payments go to the loan principal during the loan duration, a business owner will expect to make large payments at the end of the term.

Mortgages with balloon payments: a balloon mortgage is a combination of both adjustable and fixed rates commercial loans for real estate. It is a kind of mortgage that leaves a large payment due at the term-end for a property owner to settle since not all payments will be amortized periodically. Although the balloon mortgage option would seem advantageous on one part as it eases debt service when it defers some costs, on the other part it would seem cumbersome when a large payment remains due at the end.

Refinancing options on commercial mortgages

Bank commercial mortgages: most commercial real estate owners see a conventional bank mortgage as the optimal refinancing form. Commercial loans that bank lenders provide help reduce monthly mortgage payments for borrowers due to their fantastic rates that can be as long as 30 years.

Mortgage refinancing using SBL: several traditional lenders, like community lenders, credit unions, and small and large banks, usually use Small Business Loan program to refinance various mortgages.

Private mortgage lenders: Individuals and other private investment groups are the ones that provide non-bank private commercial mortgages. Private commercial lenders can provide aggressive and creative financing solutions since they aren’t bound by many restrictions like the conventional mortgage lenders. In essence, private lenders can offer every kind of commercial real estate financing option like cash-out refinancing, term loans, and bridge loans.

To wrap it up

Different commercial property lenders will offer different structures, terms, and rates for the loan facilities they provide. This scenario creates an enormous number of lenders that provide commercial mortgage loans for real estates. On the other hand, a real estate or a business investor has plenty of options to refinance mortgages. Since there exist many loan and lender options, it usually becomes tricky for a business to obtain the right kind of loan.