Commercial vs residential loans |
| Posted by: Jay C Jul 2 2004, 08:28 AM |
| In a prior post, a question was posed regarding the mechanics of a 5 yr commercial loan with a 20 yr amortization. In the respones, it was stated that the banks refinance after 5 yrs to avoid “interest rate risk” but this was not necessary with residential mortgages. a) why not?  If the rental property that I am purchasing is a single family residence or condo, should I be able to get a residential mortgage?c)What is the benefit of a commercial loan over a fixed rate 20 yr mortgage on the same property? Thanks |
| Posted by: loanuniverse Jul 2 2004, 08:53 AM |
| Jay: ” why not?” Banks do not have to worry about interest rate risk in residential loans because there is a very active secondary market in these types of securities and most of these loans are sold to investors such as “Freddie Mac”. That is, the loan is not going to remain in their books. The borrower might think that he is still dealing with the same lender since the bank usually keeps the “servicing”, but the risk is passed on to someone else. Commercial loans on the other hand, are usually kept in the bank’s balance sheet as an asset. A little note about interest rate risk is that it can be mitigated by using derivatives, but then we are starting to talk about really complicated things like “duration”. ” If the rental property that I am purchasing is a single family residence or condo, should I be able to get a residential mortgage?” Some banks have “investment property loan products that are managed through their residential loan departments. You will probably have to pay a little more, but I am really not familiar on the parameters of these loans. You should inquiry with lenders in your area. ” What is the benefit of a commercial loan over a fixed rate 20 yr mortgage on the same property?” Getting a residential loan is almost always a better proposition for the borrower specially if you can get a 30 year amortization with a low down payment. The problem is finding a lender willing to do this on a non-owner occupied property. You are also better off if you can get a fixed rate for the length of the loan. I have been doing commercial loan analysis for quite some time, and remember when prime used to be 8.5%. It would hurt if your rate adjustment came at a period when the rates are high. Good luck. |
