Types of commercial mortgages
Lenders offer multiple types of commercial mortgages. Some are similar to residential mortgages, while others are exclusive to businesses.
Fixed and variable amortized mortgages
If you've ever taken out a car loan or a residential mortgage, you've likely made amortized payments. You pay an equal amount each month, usually 15 to 25 years for commercial mortgage lending. At first, as much as 95% of each payment goes towards interest, but every month you pay a little more towards the principal until the loan is paid in full.
Fixed rate mortgages carry an unchanging interest rate for their entire term. They allow you to lock in rates when they are low, but you must pay that same rate even if the interest rates fall. You can always refinance a fixed rate mortgage if the rates fall significantly.
Variable rate (or adjustable rate) mortgages offer lower initial interest rates than fixed rate loans, but you are subject to fluctuating market conditions. If the rates go down, your payments will be lower; if rates spike, you will make progressively larger payments. Variable mortgages are riskier because they don't allow you to accurately budget for payments from month to month.
Many businesses that provide commercial mortgage lending start with fixed rates for three to five years, then switch to variable rates for the remainder of the mortgage. This type of hybrid loan is sometimes called a two-step loan. This keeps payments predicable at first, delaying any fluctuations until you're better equipped to handle them.
Interest only mortgage
Despite the title, you still must pay the principal balance on this and any type of commercial mortgage lending. "Interest only" simply refers to making payments exclusively towards the interest for the first three to five years. This initially reduces your monthly payments so you can concentrate on improving your cash flow. However, since you're not paying down the principal during this time, your monthly payments will be considerably larger once the interest-only period ends.
Mortgages with balloon payments
If you're looking to stretch your monthly dollar, you can apply for commercial mortgage lending with a final balloon payment. This shorter-term loan - which can range from 5 to 15 years - requires small monthly principal and interest payments. This allows you to use immediate cash flow to grow your business. Your last payment, or balloon installment, includes the remaining interest and principal on the loan and can amount to tens of thousands of dollars or more.
Balloon payments are risky for any business, particularly if you're applying for commercial mortgage lending for the first time. Anticipated growth in your business may or may not arrive on schedule - but the balloon payment definitely will. To avoid problems, you can either negotiate for a lesser balloon payment before agreeing to a loan, or roll the balloon into a new loan with better payment terms when it comes due.
You may qualify for less common commercial mortgage lending types such as endowment mortgages, which are similar to interest-only loans but funded with proceeds from life insurance policies, personal savings accounts, and retirement plans.
If growing your business quickly is the most important to you, hard money loans or bridge loans might suit you better than mortgages. These business loans can provide short-term financing with much less documentation, but higher interest rates. Read our Business Loans Buyer's Guide for more information.
If you have held your current mortgage for three years or longer and would like better terms or a lower rate, consider refinancing.
Refinancing (or "cash-out refinancing") allows you to leverage the appreciation in your property towards expansion or a down payment on a new loan. It's quicker than the original mortgage process because you already have the property and the documentation, as well as experience operating the property. However, if you're working with a different lender than your first mortgage, you'll still need an appraisal and an environmental test, if applicable.