Understanding the terms involved in a commercial mortgage is critical. These terms will help you to select the loan that best meets your current needs and your needs for the future.

Most business owners first and biggest concern when shopping for a commercial mortgage is the interest rate. This is one of the biggest factors in how much you are going to pay to borrow the money that you are requesting. As a borrower, you can look at the interest as the cost of getting a loan. And also understand that most businesses are never in a position to purchase a commercial property without getting a loan. It is the business equivalent of a home mortgage. It is also the way that the lender is going to make money from the deal.

Another important factor to consider is an adjustable rate versus a fixed rate commercial mortgage. A fixed interest rate is one that is set at the time of the loan creation and it remains constant for the entire term of the loan. This provides stability and makes it very easy to budget for future loan payments. A variable or adjustable rate is one that can fluctuate from month to month based on the prime rate and other factors in the economy and business world. In most cases the variable rate starts out lower than a fixed rate but the fluctuation can cause it to end up being much higher. Overall a variable rate is more of a gamble than a fixed rate and can be much more difficult to work into a long term budget.

Finding a term, or time frame, for the repayment of the loan is also very important. A shorter term means that the monthly payments will be larger than if you were to elect for a longer term. You will want to find a balance between the amount that you can afford to pay each month and how much interest you are willing to pay for a longer term.

Banks Make Money from Interest

Knowing that the bank is in business to make money, it makes sense that they are counting on you paying interest for a certain period of time, the term of the loan. If you choose to pay the loan off early then the bank is not getting paid as much interest and they are not making as much money. To offset that potential loss of interest and revenue, many lenders will insert an early payoff penalty clause into your loan. In some cases it is a percentage of the interest that you don’t pay due to the decrease in the term or in other cases it is a flat fee that you must pay. Knowing if there is such a clause will help you decide which loan offers the best terms to meet your needs.

Evaluate All of the Terms Carefully

When you are evaluating terms on a commercial mortgage, it is important to understand all of the fees as well as the repayment process. All of this information tells you how much you will truly be paying for the money that you are borrowing and also how long you will have to repay the money.