The interest rate is the most important pricing component of your commercial mortgage rate. Lenders base their interest rates on the prime rate – the rate banks offer to large corporations and the most creditworthy borrowers. As of Spring 2007, the prime rate is 8.25%.
A lender typically charges prime plus a percentage of the total loan amount that can range from half a percent to several percentage points. The rate will vary greatly based on several factors such as the size of your down payment, the length of your loan, the location of the property, and the risk level of your business. You may be able to get a lower fixed percentage for the first few years before it becomes a larger variable percentage later on.
If you only qualify for a high interest rate now, you can refinance your commercial mortgage rate with another lender once your business improves. Since most businesses refinance with a different lender, you can qualify for a better interest rate, but may still responsible for many of the same fees as a new commercial mortgage.
Another significant expense is the down payment – 20% to 30% of the purchase price. However, that money immediately becomes equity in the property. You can put less than 20% down, but it will considerably increase your interest rate.
Completing the process
Before you sign a single document, make sure you negotiate better interest rates or longer mortgage terms with the lender. Since you will likely make payments on the property for several years, you need to be happy with the terms and conditions. Even if you can't negotiate a lower commercial mortgage rate, see if the lender can decrease or eliminate certain up-front costs, balloon payments, or early redemption charges.
Additional costs
In addition to the monthly payments, you'll also be responsible for several up-front fees that can total tens of thousands of dollars and possibly hundreds of thousands of dollars. Make sure to budget for these closing-related fees above and beyond your monthly commercial mortgage rate payments.
- Valuation fee. Appraising the value of the property can cost from $1,500 to $4,500 depending on the size of the property. If you're buying land to build on, these fees may be several thousand dollars more as they must make sure the land can accommodate your building needs.
- Environmental surveys. Buying potentially dangerous property, such as a gas station with underground fuel tanks, requires more stringent inspections. A Phase I environmental inspection costs $1,500 to $4,500. If the building requires a more intensive Phase II inspection, expect to pay $3,500 to $10,000.
- Due diligence. The lender will run several credit and background checks to gauge your credit worthiness. This can cost several hundred to a few thousand dollars depending on the time and work involved.
- Broker fees. If you work with a broker, expect to pay one-half to two percent of the loan value for his or her services. If it's a particularly large loan (several million dollars), the fee will be on the lower end. If the broker helped you get a short-term hard money or bridge loan through a third party lender, the fee could be as high as 5% to 7% or higher.
- Legal costs. You may spend a few thousand dollars on a lawyer to review the contract, check for hidden charges, and ensure that the inspection work was done properly.
- Additional fees. Up-front charges such as application fees ($300 to $500) and processing fees ($500 to $2,000) may be optional based on the lender's discretion. Some lenders use the derogatory name "junk fees" because they feel such charges are unnecessary, while others feel these fees demonstrate that the borrower is serious. In some cases, the lender may refund these fees at closing.
Early repayment charges and balloon payments
Two other fees to keep in mind are early repayment charges (ERC) and balloon payments. As previously mentioned, both fees are negotiable but it's up to the individual lender.
