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Selecting which of the many commercial mortgages that are available is not always an easy task. You will have to decide which loan best meets the current and futures needs of your business. Whether you want a fixed rate, a variable rate, an interest only loan or a balloon note, all are available from a wide selection of lenders.
Fixed Rate Loan
The advantage of a fixed rate mortgage is you know exactly what your monthly payments are each month. You will know the amount you have available for further business use, and there is no need to worry about where interest rates are going in the future.
The disadvantage of a fixed rate mortgage is that if rates fall, had you chosen a variable rate loan you would have saved some money. If you think rates will not come down in the near term, then a fixed rate product may be the right one for you.
Variable Rate Loan
The appeal of a variable rate loan is that the interest rate is lower than a fixed rate mortgage loan at the time of closing. The adjustment factor can cause the rate to go up or down, depending on market conditions. This can be a problem since you may not have allowed for the rate increase when you took out the loan.
Also, a rise in the rate can have an effect on the expansion of your business. One option is to try the variable rate for a period of time, and then roll into a fixed rate loan at a later date.
Interest Only Loan
While the low payment on an interest only loan is appealing, the fact that your principal is not being reduced each month can end up being costly in the long run. If you decide to refinance to a fixed rate loan at some point, the interest rates may have risen to a level that would cause you to have to put a strain on your cash position in order to make the monthly payments.
If you do structure your commercial mortgage loan to be interest only, try to make principal reductions when you are able. This can make an interest only loan a cost-effective alternative to a fixed rate loan. There will eventually come a time however when the principal must either be paid off, or rolled into another loan product.
When you take out a balloon mortgage loan, the payment is amortized over a longer period than the term of the loan, and the interest rate can be either fixed or adjustable. For example, you could have a 10 year balloon mortgage with the payments based on a 20 year loan. When the 10 year term expires, the balloon amount is due in full, or you can refinance the balloon into a new loan.
Since your payment is less on a balloon than a fixed rate loan, you can use the increased savings to grow your business. However, if you are unable to payoff the balloon at maturity, you run the risk of having to pay a higher rate of interest.
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