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Types of commercial mortgages

Like so many other purchases, you have a wide variety of options for the type of commercial mortgage you can work with. Look at the various pros and cons of each type of mortgage before making a decision.

Once you have a building you want to purchase, Business Finance Resource can help make your search easier by matching you to multiple commercial mortgage lenders that can help you make the best decision for you and your business.

Amortized mortgage
This is very similar to personal loans you may have taken out for a new car or home. The way it works is you pay the same amount each month for a specific period of time. Your payments in the first few years of the mortgage go towards the interest, and over time you pay more against the principal until the mortgage is paid in full.

Fixed rate mortgage
The interest rate stays the same for the length of your mortgage. It’s a great way to lock in a low rate, but you also miss out when rates fall. You can refinance a fixed rate agreement, but will have to go through much of the process again.

Variable rate mortgage
These adjustable mortgages reflect the state of the market when the monthly payment is due. If the federal rate is low when you make a payment, your payment will be lower. But if rates are rising, you’ll have to account for larger payments that month.

If you want to take advantage of the benefits of fixed and variable rate mortgages, a lender can arrange a mortgage that starts off as fixed and becomes variable. This allows you to budget carefully early on and then assume more risk in the later years of the mortgage.

Interest only mortgage
Even though the type of mortgage has the words “interest only” in it, this actually refers to just the first few years of the mortgage. After that, you have to pay considerably larger payments that focus in on paying down the principal.

The balloon payment
Many commercial mortgages end with a final balloon payment. These are typically shorter-term loans with very small principal and interest payments. When the term ends, you have to make a very large final payment to own the property free and clear. Many businesses choose to roll the balloon payment into another loan when it comes due to get a lower rate on the new mortgage.