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Health & Fitness

Small Business Query-Is the lowest mortgage rate really the best deal?

When you are considering acquiring or refinancing commercial real estate property, it is important to not just focus on the interest rate that is being quoted but to make sure that you review all of the loan terms that are being offered. In most cases, the lowest interest isn’t always the best deal!     When you’re shopping rates, below are 5 key questions that you should also ask the lender;  
1. What type of commercial real estate mortgage loan terms does your institution offer?  
There are basically 3 types of commercial mortgages; Fixed Rate Mortgages, Adjustable Rate Mortgages and Balloon Mortgages.   A long term 20 or 25 year fixed rate mortgage is your best option.  While this type of credit structure is common for residential mortgages, it is extremely uncommon for business loans.       The 2nd best option is an adjustable rate mortgage (ARM).  With an ARM, the lender is committing to a longer term loan; however, the interest rate will adjust after a certain period. For example, with a 5/5 ARM the initial rate is fixed for five years and then will re-price every five years thereafter until maturity at an index rate (T-bill, Wall Street Journal Prime Rate, Swap Rate) + a margin. In general, these are attractive terms. The 3rd option is a Balloon Mortgage. Balloon mortgages are generally short term mortgages, ranging from 3 to 10 years in duration. When the term expires, you are faced with a number of decisions. For example, with a five-year balloon mortgage, you would make five years of monthly payments at a fixed rate of interest and then, at the end of the five years, either pay off the rest of the principal, take on a new mortgage, or sell the property. If you can’t pay off the principal in one lump sum, you must attempt to refinance. If interest rates have risen significantly in the interim or if your credit rating has deteriorated since the loan was issued, you may face mortgages with unaffordable terms and costly loan fees.
2. What is the amortization period?
The “industry standard” amortization period for commercial loans is 20 years.  However, some financial institutions offer 25 year and in rare situations, 30 year amortization schedules. The upside to having a longer amortization is your cash flow improves.  The downside is over the long run, you pay more interest.   
3. Are there points, closing costs?
This is a big one!  Loan fees can be expensive.  When you are comparing interest rates, be sure to also compare loan fees.  The fees you pay as a borrower can easily make taking a slightly higher rate, with less fees the better financial decision.  Use your calculator!! 
4.  Are there any prepayment penalties? Some credit institutions offer low rates (aka “teaser rates”) but that rate may come with a hefty prepayment penalty should you decide to pay your loan off early.  Prepayment penalties are typically charged when a loan is paid off within the first 5 years and the penalty is based on a percentage of the current outstanding balance. Another type of prepayment penalty is a Yield Maintenance Fee.  This type of prepayment fee is based on the movement of interest rates. The fee is charged by the lender to the borrower, and the borrower pays the fee in the hope that the mortgage-backed investment will provide a higher yield.  
5. How long is the approval process?
 No matter how attractive the interest rate is, it doesn’t matter unless the loan closes. It’s extremely important that you know how the lenders approval process works, including how long the loan process will take from application to close. Other questions you may want to ask the lender are; what documentation is required to submit a loan application? How often does your loan committee meet? Does the lender have individual loan approval authority?  What are the fees that the  collects upfront?  
Keep in mind, perhaps the most important thing to consider when choosing the bank with whom you will be taking a business mortgage is do you have a banker to ask these questions of??  An established relationship, with a trusted banker is a valuable asset for you in this type of decision and will prove invaluable in many other financial decisions that affect your family and your business into the future.



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