Interest rates vary depending on your credit score.
Purchasing real estate requires either a commercial mortgage for business purposes or a residential mortgage for personal purposes. Lending standards have tightened considerably for both commercial and residential mortgages since the turbulent housing crash. Guy Cecala, publisher of "Inside Mortgage Finance," states that you need a credit score of at least 730 to get the best interest rates. Others can expect higher down payments or higher interest rates.
Fixed Rates
You can expect to pay a higher interest rate for a commercial mortgage than a residential mortgage. The preferred commercial mortgage is the fixed-rate loan, which is similar to the fixed-rate home mortgage loan with a constant interest rate throughout the term. The length of the term between the two mortgages varies. Commercial mortgages generally have a term of three to 10 years, whereas you would be inclined to take a residential mortgage for a longer term of 30 years.
Qualifying Factors for the Best Rates
Lenders look for your ability to repay the loan, whether it is commercial or residential. The strength of your ability determines the rate that you can get, assuming you qualify for the mortgage. For a commercial mortgage, the bank looks at the revenue generated by the business, divided by your total debt for an outcome of a minimum of 1.2, which is your "debt service coverage ratio" above break-even. If your numbers work, you could apply for a mortgage even if your business has weak or bad credit and still be able to purchase the property, although you may need to show your personal credit history and provide a down payment. With a residential mortgage, the lender looks for your annual income over the past three years to show stability, your credit history, and 10 to 20 percent down.
Interest Background
The bank's residential rates are based on supply and demand in the market. The bank's commercial rates are based on a spread over the federally regulated LIBOR or the prime rates. As a result, the rates on the two products vary. For commercial mortgages, you will see that when the federal government increases its rate, the commercial mortgage rates increase as well. Residential rates appear to increase as well, but for a different reason. Rather than an automatic correlation as with commercial mortgages, the government controls the fund rate to increase or reduce long term borrowing.
Variable Rates and Term
While residential mortgages may have a 30-year term and borrowers prefer fixed rates, commercial mortgages have a short-term fixed mortgage with a lump-sum balloon payment at the end of the term, followed by a variable rate. For example, interest may be at 5 percent for five years, and at the end of the five-year term, the existing mortgage must be repaid or refinanced and replaced with a variable interest rate.
