| Commercial loan periods |
| Posted by: toby Mar 14 2004, 11:41 AM |
| Can anyone tell me what the normal loan period is for a commercial loan? I have been told that usually the loan is for 5 years and amortized for 20 yrs. which means at the end of 5 years you either refinance or payoff? is the refi done at the then current rate or is there a cap? does anyone have any experience with this or knowledge about it? thanks, toby.. |
| Posted by: loanuniverse Mar 14 2004, 02:41 PM |
| Toby: The following is my feedback in reference to your post: Can anyone tell me what the normal loan period is for a commercial loan? Commercial loans are not homogeneous products. Term and structure are usually left to negotiation. While most people financing home purchases get a 15 year or 30 year fixed rate mortgage, commercial loans can have a variety of maturities and repricing options. I have been told that usually the loan is for 5 years and amortized for 20 yrs. which means at the end of 5 years you either refinance or payoff? While there is no standard maturity, the person who told you this is right. Most loans do have a five year maturity with a twenty or twenty-five year amortization. is the refi done at the then current rate or is there a cap? If the loan matures in five years then you will have to start looking for a replacement loan at least two months prior to the maturity to give time for the appraisal to get done {I am assuming we are talking about a commercial real estate property loan}. This would be like getting a whole new loan and will be priced accordingly to the prevailing rates at that moment. Some other information: The reason why loans are either repriced or mature in five years is to avoid what lenders call “interest rate risk”, which in layman’s terms is lending money at a rate lower than what you have to pay your depositors. This is not necessary in the residential loan market. The best way to avoid a problem is to get the original lender to give you a loan with a longer maturity, but with a “repricing event” that gets rid of their interest rate risk. For example, you could request a ten-year loan that gets repriced at five years, which means that the interest rate will change and your payments will change in five years, but there is no risk that you will not be able to get financing at that time, and saves you some money in fees. Hope this helps. |
