What You Need to Know About Commercial Mortgage Rates

Whether it's for a house, a car, or even a business building, almost any loan you take out has an interest rate . The interest is a rate of extra costs you accumulate over time for the loan's term. Interest rates are important since they allow lenders to make a profit from letting people borrow money. But just like there are favorable and unfavorable loan terms, there are also better or worse interest rates . This is doubly true for commercial mortgages , as commercial buildings are typically more expensive and may require longer loan terms than many typical residential mortgages. If you're looking to purchase a building for your business or set up a new mortgage for your current enterprise's home, you need to know about commercial mortgage rates . Below, you'll find a breakdown of these rates, as well as an explanation of how they are set. Let’s get started.

Commercial Mortgages Explained

Most people cannot purchase their homes outright, and most business owners also don't have the scratch to buy commercial real estate, like a storefront property or a warehouse , without taking out a loan. Just like there are regular mortgage loans, there are also commercial mortgages , which are specialized mortgage loans with different attributes, term lengths, interest rates , and more. Commercial real estate loans are offered to business entities, like developers, corporations, small businesses, and even funds and trusts. They usually range for terms between five and 20 years or so, although the amortization period is usually longer than the overall term of the loan. In contrast to residential home mortgages, commercial mortgages ’ loan-to- value ratios ( LTV ) are usually between 65% and 80% for a multifamily construction. Since most small business owners will need to take at least one commercial mortgage to start a business or expand their enterprise, it’s important to know more about what you can expect from commercial mortgage interest rates , fees , and other aspects.

Interest Rates for Commercial Mortgages

As with regular mortgages, the interest rates for commercial mortgages are essentially the fees you have to pay to borrow money in the first place. Interest is accrued over time with each billing cycle and is represented by a percentage rate. It’s important to remember that commercial mortgages are for buildings with distinctly different purposes than residences. For example, commercial buildings are designed to:

• Take more foot traffic, especially if they are storefronts. This may affect depreciation or wear and tear
• Last for longer, particularly if the property is in a good location
• Take up more space, so they’re often more expensive

All of this results in buildings that are more expensive than normal homes. So they require larger loans for a buyer to complete the purchase . This necessarily affects the interest rates for commercial mortgage loans . So, what real estate ranges can you expect if you take out a commercial mortgage ? It depends on the type of loan you take out and whether you are purchasing the property for commercial business or for investment. Here are some basic examples:

• USDA Business & Industry Loans usually have rates between 3.25% and 6.25%
• Traditional bank loans may have mortgage rates between 5% 7%
• SBA 504 Loans incur interest rates for commercial mortgages between 2.231% and 2.399%
• Office building mortgages may have interest rates of around 3.87%
• Retail buildings typically have interest rates of around 4.29%
• A restaurant building might have a commercial interest rate for its mortgage agreement of around 5.91%

But the above examples are just estimates based on past rates. In truth, commercial mortgage rates can be based on a variety of factors.

How Are Commercial Mortgage Interest Rates Calculated?

To really know whether a commercial mortgage is a good choice for your commercial property needs, you need to know how the lender in question uses calculators for the interest rate and what may affect its overall cost. Commercial real estate loan rates can be calculated in many ways, some with a final balloon payment at the end to make the commercial loan rates more attractive. These loans also have loan origination fees .

The Prime Rate

Like regular mortgage rates, commercial real estate rates are also affected by the so-called prime rate. The prime rate , which your equal housing lender will find using government websites or from sources like the Wall Street Journal, is an interest rate benchmark used to set home equity lines of credit, credit card rates, and other investment interest rates . The prime rate itself is based on the federal funds rate, which the US Federal Reserve sets. Many lenders will use the prime rate as a base value when setting their interest rates for their loans. Then they will adjust their contract interest rates depending on the other factors described below. In other words, if the residential loan prime rate is high, you can expect commercial mortgage rates to also be higher than average. The reverse is true if the prime rate is relatively low. The prime rate tends to oscillate based on the status of the greater economy.

Other Prevailing Interest Rates

Aside from the prime rate, a commercial mortgage ’s interest rate could also be affected or even set using other prevailing interest rates in the industry. For example, if the Small Business Administration is having issues with the U.S. Treasury, it may have higher than average interest rates on SBA loans , which could affect the costs for lenders handing out commercial mortgages . Again, this is at least somewhat tied to the state of the broader economy. In times of economic strength, prevailing rates will usually be favorable to drive business.

Your Credit Rating/Business Credit Rating

Naturally, your personal credit score and your business credit score (which are distinct ratings) will affect the interest rates you can expect from any prospective commercial mortgage . Your personal credit score is determined by things like:

• Spending and borrowing habits
• Your history of making on-time or late credit or bill payments
• Your open credit or debit accounts

Your business’s credit score is rated on a separate scale from the typical credit score range. But it’s generated using many of the same methods described above. For example, your business credit score can be improved by:

• Being in operation for longer
• Taking out and paying off other loans on time
• Not incurring tons of penalties and fees

The higher your personal and business credit scores are, the more likely you are to get an optimal commercial mortgage rate when applying for different contracts.

Loan Term

The term of the commercial mortgage in question will determine the interest rate as well. If the loan has a longer repayment term, it will usually have a higher interest rate because it will cost the lender more money to lend you that cash than if it were a short-term mortgage. In contrast, short-term mortgages are associated with lower than average interest rates since the lender takes less of a risk giving you the money. Shorter terms imply that you will pay back the entirety of the loan faster than longer terms.

Other Factors

Don’t forget a variety of other factors that can affect the commercial interest rate you can expect for your business’s mortgage(s). These include: The size of the initial down payment Larger down payments knock off a larger chunk of the commercial mortgage at the beginning of the loan's term. The lender , therefore, takes less risk letting you borrow money from them and will reward you with a lower interest rate . The reverse is true if you pay a smaller down payment. You’ll also be more likely to be approved for a commercial mortgage loan if your down payment is more. Whether the interest rate is fixed or variable Fixed interest rates do not change with time, so they may be slightly higher than average, at least at first. But the advantage to fixed interest rates is that you always know what you’ll pay with each billing cycle. Variable interest rates do change as things like the prime rate and other prevailing interest rates shift. Therefore, you could benefit from a lower than average interest rate some of the time. But you’re always at risk of having a higher than average interest rate if the economy falters.

Summary

In the end, whether a commercial mortgage contract is a good choice for your unique needs and your budget situation is something only you can determine. We recommend diving deep into a loan contract before signing on the dotted line so you don't take out a loan you can't afford, or that will bankrupt your business. Have questions or are you looking for alternative sources of funding for your enterprise? Seek Capital not only has business loan resources you can check out right away, but we also have several guides that can help you guide your business to huge success. Contact us today for more information! Sources: Commercial Real Estate Loans & Property Financing | Bank of America SBA Announces New Reduced 504 Loan Debenture Rates | SBA.gov What Is the Prime Interest Rate and How Does It Affect You? | CNBC Credit Karma Guide to Business Credit Scores | Credit Karma