Basic Background Information about Commercial Real Estate Loans and Residential Loans
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The commercial real estate is a vast business that includes retail outlets, office buildings, business parts, hotels, and residential complexes, and all for the purpose of monetary gain of course. It takes therefore vast amounts of financing to carry out this business, and so they get their finances from commercial real estate loans. Know that in this case of loans, it is secured by liens on commercial property and not residential property.
For your information, there are differences between residential and Commercial real estate loans. First of all, as the terms suggest, residential credits are often given to persons while commercial advances are extended to business entities like companies, developers and partnerships. These commercial entities are formed specifically in owning commercial real estate.
In the case of a residential mortgage loan, the debt is repaid in regular installments over a fixed time schedule thus making it an amortized loan. While commercial loans, can be paid for a span of 5 to 20 years from the day credit is approved and given, thus the amortization period is longer. The interest rate of the lender is dependent on the duration of the term of the loan and the amortization period. Therefore, the longer is your loan repayment schedule, the higher is your interest rate.
Because the Project Finance Loans term is longer, commercial loans are subject to higher interest rates in comparison to residential loan. On top of the interest, commercial real estate loans have fees that are added to the overall cost of the loan, like fees on appraisals and credit application.
And know this, that if you settle your debt on commercial loan before its maturity date, you will be required to pay penalties for prepayment. There are four types of prepayment penalties. One is prepayment penalty, the most basic prepayment penalty, which is calculated by multiplying the present outstanding balance with the specified prepayment penalty. Next is called interest guarantee wherein even if you have paid off your loan early, the lender has a certain amount of interest that you will pay. Another type is the lockout wherein you the borrower will not be allowed to pay off the loan before the agreed specified date. And the fourth is defeasance, wherein instead of giving cash to the lender as payment, you are to give new collateral in exchange for your collateral used as loan originally. Clearly, the difference between a residential and commercial loan is very different.
For other details, you could also visit https://www.youtube.com/watch?v=3UpT1OsdMmo .
