Commercial real estate otherwise abbreviated as (CRE) is a real estate branch that is solely used for monetary gains or business purposes. It entails residential complexes, hotels, business parks, office building, and retail outlets. You can use commercial real estate loans to finance all these business ventures. Most financiers expect you to use liens on commercial property to secure these loans instead of residential property. There are so many people all over the world who have benefited from these loans. The most important thing is to make sure that you are making a wise investment decision.
The Difference Between Commercial and Residential Loans
Entities vs. Individual
Individual lenders and banks actively involve themselves in the process of advancing loans for commercial purposes just like is the case with residential loans. Residential credits are more often given out to individuals while commercial advances are awarded to business entities like partnerships, developers, and even corporations. The primary objective for the formation of these entities is the ownership of commercial real estate.
Repayment Schedules for the Loan
Residential mortgage debt is normally repaid using regular installments over a time period that is fixed. This attribute qualifies it to be an amortized loan. On the contrary, the debt of commercial loans can be paid over a period of five to twenty years from the day you procure the credit. The debt of the credit is often shorter than the amortization period. The interest rates that the lender charges solely depend on how long the loan term is and the amortization period. You will pay higher interest rates if you are dealing with a longer repayment schedule.
Fees and Interest Rates
Commercial loans are subjected to higher interest rates in comparison to residential credits. Moreover, commercial real estate loans come with an additional fee that increase the overall cost of the loan. Some of these fees include credit application and that levied on appraisals.
Commercial Real Estate Loan Prepayment
Most financiers expect any investors who settles his or her commercial real estate loan before the maturity date to pay a prepayment penalty. There are basically four types of prepayment penalties for these loans. The first one is the prepayment penalty that you can calculate by multiplying the present outstanding balance by the prepayment penalty that is specified in the loan agreement. This is the most basic form of prepayment penalty. The next one is the interest guarantee that subjects the lender to a particular amount of interest even if you are going to pay off the loan early. The third one is the lockout that does not permit the borrower to payoff the loan before the elapse of a certain period. Finally, we have the defeasance that acts as a replacement for the collateral. The borrower gives the lender a new collateral instead of exchanging cash for their collateral.
In summary, commercial and residential real estate loans differ greatly from one another. The lenders consider the collateral when processing any commercial real estate loan for a business entity. He also looks at the financial ratios and credit worthiness of the owner of the entity.