Commercial mortgage rates

source : buyerzone.com

A strong credit rating and steady cash flow may help you get a favorable rate on a home mortgage, but they're only part of the story when you want to buy commercial property. Commercial lenders also require strong business history, mounds of paperwork, and lengthy background checks to give your business favorable commercial mortgage rates.

The standard commercial mortgage rate starts with prime, the interest rate that banks provide to creditworthy businesses and large corporations (8.25% as of July 2007). The lender then tacks on an additional percentage ranging from a quarter percent to several percentage points. This varies according to how much money you can put down and the risk level of the property you're buying – the lesser the risk, the better the rate.

Factors impacting commercial mortgage rates
Depending on the strength of your finances, you can determine how favorable a commercial mortgage rate you'll qualify for.

1. Down payment – Lenders require 20% to 30% of the purchase price up front. The more you can put down, the less you'll have to borrow, which keeps your monthly payments lower.
2. Loan-to-value ratio (LTV) – This is the amount you want to borrow divided by the appraised value of the property. The lower your LTV, the better your interest rate will be.
3. Debt service coverage ratio (DSCR) – You must demonstrate to lenders that you can generate more money than you need to make payments. Your DSCR is determined by taking your net income and dividing it by your monthly interest and mortgage payments – a rate of 1.25 or higher means you're a low risk for a commercial mortgage.

Types of commercial mortgages
A fixed mortgage is the most common commercial mortgage you can get. Fixed mortgages have consistent payments throughout their term, but you'll miss out on a lower percentage if interest rates fall. Commercial mortgage rates tend to be slightly higher for fixed mortgages than for adjustable mortgages.

Commercial mortgage lenders can offer different mortgages depending on your financial needs.

For instance, if you want to keep payments low through the first few years, lenders can offer an interest only mortgage – but you'll have to be prepared for higher payments in the later years. A variable rate mortgage lets you take advantage of falling commercial mortgage rates, but you'll also be responsible for higher rates when the real estate sector improves.

Finally, if your existing mortgage rate is higher than current rates, lenders allow you to refinance by applying equity in your property towards a down payment on a new mortgage with a new, lower rate.