Strategy. This could be the key in getting the lowest rate possible on your next commercial mortgage. You will need to be smart and you will need to plan. So gather some of these tips and your trusty mortgage calculator and start strategizing now
1. Rate Buydowns
One of the best ways to lock in a lower interest rate is by paying a percentage of the loan amount up front at closing. This is known as a rate buydown. Basically, the more money you put down up front, the lower your interest rate will be for the life of your loan. Commercial mortgage lenders usually provide a scale that will show you how much you can save with a buydown.
Here’s an example:
Let’s say you’re looking to take out a $1 million loan on a 5-year term. You’re trying to determine whether you can save more money by paying 1 point up front ($10,000) to reduce rate and margin for the mortgage’s term or simply make the regular monthly payments for the duration of the loan.
|Term||5 years||5 years|
|Amortization||30 years||30 years|
|Monthly Principal & Interest Payment||$6,893.62||$6,636.42|
In this buydown scenario, you would save $257 a month. That means you would reduce payments by $15,432 over the course of the loan. Sounds like a no brainer, but buydowns are not for everyone. For example, if you only plan to own your commercial property for a very short time, you may end up paying more for the buydown, and the costs that come with it, than you save on lower monthly payments. Also, if you’re worried about raiding your savings for this deal, it may be best to hold off until your income increases.
2. Interest Only Options
Another way to lower payments at the beginning of your loan is to take out an “interest only” commercial mortgage. This means that for a period of time, usually 1 to 2 years, you are only required to make payments on the interest of the loan.
This is a great option for many and especially cash-poor borrowers expecting their businesses to grow quickly. However, there is a sizable risk involved. If your income doesn’t increase as fast as you hoped, you may face real problems once the principal payments are included. It’s a good idea to use Commercial Direct’s Loan Customizer now to get a realistic idea of your payments and risks.
Commercial Direct Solution: When you use Commercial Direct’s Loan Customizer to design your mortgage, you have the freedom to choose any interest only period between 1 and 24 months.
3. Loan Terms
A shorter-term commercial mortgage will feature lower monthly payments, so one solution for borrowers looking to lower their payment each month is to take out a 5-year loan instead of a 5 or 7-year alternative. Longer-term loans tend to have higher interest rates and the fact that you will make more individual payments means that you may end up paying more in interest overall.
Start strategizing now
We’ve made it easy to begin strategizing now. With some quick calculations you can lower your monthly payments. Consider the points above and start designing your perfect commercial loan with Commercial Direct.
Want to learn more about your payment options as a commercial mortgage borrower? Contact a Commercial Direct representative today to discuss your needs and the solutions you can secure for your next purchase or refinance.
Zack North is the Director of Marketing for Commercial Direct. As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.