One of the trickiest aspects of commercial real estate loan rates is figuring out whether or not the borrower is going to have an increase in interest or not. This is not easy to predict, because it depends on the strength of the market and the actions of the federal government, but there are ways to minimize the impact of a possible increase.
This is one of the most stressful aspects of sustaining a commercial loan, largely because there is nothing that the individual borrower can do to stop an interest rate increase on the federal level. Commercial real estate loan rates are not in flux from day to day, but over the course of three to five years, there is bound to be a change. However, that does not mean that a borrower cannot take steps to try and control various aspects of the loan that might be affected.
One of the ways that borrowers can eliminate this potential increase is by signing a fixed rate loan. Essentially, this locks the lender and the borrower into the interest rate that is the going rate at the time of signing. This way, rather than having your monthly payments fluctuate further down the line of your term, you will know exactly what to expect. The issue here, is that if rates go down, you will not be able to capitalize on the lower interest payments. This is very similar to a residential mortgage with the same fixed rate term. In this way, a borrower can easily budget for their commercial real estate loan rate.
However, fixed rate commercial loans are difficult to obtain. Because of the increased risk for lenders in capitalizing on their investment, these loans are typically reserved for borrowers who have excellent credit or a tremendous amount of security provided through collateral. If you can manage to secure one of these loans, it is a good idea because, even though commercial rates don’t change a tremendous amount, there is bound to be some change over time.
If you cannot manage to secure a fixed rate commercial loan, the next best thing that you can do is to build a potential increase into your strategic plan for the property development. If you can stay ahead of the rate of inflation and increase your profit margin during the time when the interest rates remain set, you will be well positioned to have minimal impact when the rates do increase. If the rates go up, you will have excess capital to absorb the increased monthly payments. And if the rates go down, then it will mean even more capital for current or future investments. In either case, you must plan for your commercial real estate loan rate to change over the term of the loan.
How much of a change can I expect with commercial real estate loan rates?
The reality is that while there is bound to be some change, it will not be drastic in either direction. Over the course of 20 years, if your term is that long, you can probably expect to see a change of a handful of percentage points. In the past few years, commercial real estate loan rates have been incredibly low, so it is a safe bet that they will gradual begin to increase.
Level 4 Funding LLC Private Hard Money Lender
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.