Understanding Your Commercial Mortgage

I would like to assume those that have a commercial mortgage have a basic understanding of its definition. But, we all know what happens when you assume. So, to start, let's cover the basics.

Basics

Similar to a residential mortgage, a commercial mortgage is a loan using real estate as collateral to secure repayment. However, the difference being that a commercial mortgage is backed by business real estate--office building, restaurant, home development, etc. Basically, if you're looking to buy real estate for your business, this is the loan you'll seek. But what about after you receive the loan?

Balloon Payment

At some point during your loan, you'll be required to make a balloon payment. So, what's a balloon payment? Essentially, this means the balance is due at maturity. The remaining balance, or final payment, is called a balloon payment. Naturally, this will be larger than the regular payments you make on your loan.

Amortization

Most loans are amortized over a long period of time--typically 20 or 30 years. With this time period in mind, your payments can be calculated by the amount that you owe and the interest rate. These are going to be your monthly payments, making your loan more affordable.

Loan Structure

With most commercial mortgages, your balloon payment will be combined with your long amortization schedule. This means that although your loan is amortized for 30 years, your balloon payment could be due after 10 years. Basically, you'll have 10 years of paying low monthly payments, but after that, you'll be required to pay the remaining balance. Naturally this causes many people to refinance as they approach the 10-year mark.

Interest Rate

Interest rate is probably the most popular term associated with a loan. This number indicates how much you'll need to pay on top of what you borrowed. This is where lenders make their money. Naturally as a borrower, you want a low interest rate. Basically, there are two types of interest rates: fixed and adjustable. A fixed interest rate provides you with a fixed payment over the term of the loan. An adjustable rate is attached to a financial index. In other words, it responds the market.