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Commercial Mortgage Costs
The first cost to consider is also the most important – the interest rate. There’s little wiggle room as most commercial mortgage lenders base the rate on the prime rate that the banks set. This varies based on market fluctuations but it was hanging steady at 8.25% as of early 2007.
Lenders will tack on a percentage to the prime rate to compute the interest you’ll pay on the total amount of the loan (minus down payments.) This can be as little as a quarter percent (for very large mortgages) or several percentage points (for smaller mortgages less than $500,000.) Your lender may be willing to negotiate a lesser percentage based on the length of your loan term and how risky a prospect your business property is.
Remember: the bulk of your initial expenses will come from the down payment of 20% to 30% of the agreed-upon cost of the building. So if you’re buying a $1 million piece of property, expect to have $200,000 to $300,000 ready to hand over to the lender at closing.
In addition to the down payment and interest rate, anticipate spending several thousand dollars more for closing costs, appraisals, environmental testing, broker fees, legal costs, and any other fees that a lender deems necessary.
And your expenses don’t end at the closing either! In addition to monthly mortgage and interest payments, you have to keep in mind early repayment charges and balloon payments. If business is doing well and you want to remove the burden of the mortgage from your plate, you may have thousands of dollars to fork over to the lender. Likewise, if you’re paying down a low-interest, low-payment loan with a balloon payment and approaching the finish line, make sure you’re ready pay that large lump sum that’s due. Otherwise, you’ll need to negotiate a new mortgage.