Banks & Private Loan Alternatives for Commercial Mortgage Loans: Part 3

This is the third of a three-part series about commercial mortgage loans. If you are considering applying for a commercial mortgage loan, read part 1, part 2 and refer to the following list of questions before you speak with a commercial lender.

7.  What are the "hidden" costs of the loan and what is the total loan amount?

When you account for all the costs of a loan, the advertised interest rate is often artificially low.  For example, points are direct percentages of the loan that the lender deducts from your loan.  If your interest rate is 9% with two points that means your real cost of the loan is 11%. The extra 2 percentage points come off the top of the loan and into the lender's pockets.  Other costs can include:

  • Legal fees
  • Survey charges
  • Loan application fees
  • Appraisal charges
  • Any item charged against your loan or that must be pre-paid

For some loans, these charges can reach the tens of thousands of dollars. The charges often must be pre-paid in order for the loan to be approved or rejected.  You should know whether you are likely to be approved before spending money just to qualify for a commercial loan.

Other questions to consider:

  • Will my interest rate go up if mortgage rates go up in general?
  • Is a fixed-rate loan alternative available?
  • Is there a discount for faithful and consistent payments over a period of time?

Some lenders allow for decreases in the interest rates over time if you pay the mortgage on time.  But if you want to refinance and repay your mortgage early, the lender may penalize you and charge extra interest.  All of these details are important and they can seem overwhelming. 

Bear in mind your expectations for your business' performance in the future and your plans to repay the loan. Carefully consider the worst-case scenarios.  It doesn't pay to be so optimistic about the possibilities that you forget that the lender can take away your business, your livelihood, if you fail to meet all the terms of your loan.  Sometimes the lowest interest rates represent the riskiest loans.

In conclusion

Borrowers considering a commercial mortgage should evaluate both bank and non-bank funding in order to get their needs met in a timely manner, keeping in mind their own general creditworthiness. By asking questions and obtaining unbiased evaluations, you can reduce delay, frustration and unnecessary expense.  Many new lenders have emerged who challenge banks on traditional loan terms, so commercial borrowers now have more leverage than ever before when seeking commercial loans.