Mortgage Refinancing

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Commercial mortgage can be understood as a loan made using real estate as collateral to secure repayment. A commercial mortgage is similar to a residential mortgage, except the collateral is a commercial building or other business real estate, not residential property.

In addition, commercial mortgages are typically taken on by businesses instead of individual borrowers. The borrower may be a partnership, incorporated business, or limited company, so assessment of the creditworthiness of the business can be more complicated than is the case with residential mortgages.

Commercial mortgages are typically nonrecourse, that is, that in the event of default in repayment, the creditor can only seize the collateral, but has no further claim against the borrower for any remaining deficiency. Less commonly, the mortgage is supplemented by a general obligation of the borrower, which makes the debt payable in full even if foreclosure on the mortgaged collateral does not satisfy the outstanding balance.

Terms of a Commercial Mortgage

Unlike almost all residential mortgages, the majority of Commercial Mortgages in the United States, while requiring the borrower to simply make a monthly payment small enough to pay off the loan over a 25 to 30 year time frame, require a balloon payment (a total payoff) after a lesser time frame, such as 10 years. The borrower most likely will attempt at that time to refinance the loan. Thus there are two elements generally to the term of a commercial mortgage loan: the length of time allowed until balloon payment (known simply as the term), and the amortization. The length of the loan can vary from 5 to 30 years.

Uses of Commercial Mortgages

Common applications of commercial mortgage loans include acquiring land or commercial properties, expanding existing facilities or refinancing existing debt.

Interest Rates for Commercial Mortgages

Interest rates for commercial mortgages are usually higher than those for residential mortgages. The most common commercial mortgage is a fixed-rate loan, where the interest rate remains constant throughout the term. These loans are typically based on treasuries or swaps. Loans can also be variable or capped. These rates are usually based on an index such as LIBOR or prime.

A second commercial mortgage is an additional loan on a commercial property secured behind that of the first lien. The second mortgage is subordinated to the first mortgage and therefore usually carries a higher interest rate.

A word About Conduit Mortgages

In the beginning of mid nineteenth century, conduit loans, or commercial mortgages which are designed to have very standardized guidelines so as to facilitate them being sold off as commercial mortgage backed securities, have become popular. This has been part of a trend in the Investment Banking industry to become more "vertically integrated". That is, instead of helping banks and other lenders to provide fix rate products and replenish funds by selling off loans as bonds, investment banks have taken to making the loans themselves, and then selling the bonds themselves. In fact, many times the Investment Banks make little or no money on the loan itself, and only make money by the selling and trading of bonds. For this reason, these forms of loans are usually at a better interest rate then is possible through other forms of Bank lending.

However, there are downsides to this program. Investors in commercial mortgage backed securities want to ensure that their investment will remain at a fixed rate for a fixed period of time, and will not tolerate prepayments without adding a premium onto the interest rate (unlike bank lenders who will accept pre-payments after a certain amount of time). Therefore, for a borrower to prepay a conduit loan, the borrower will have to buy enough government bonds to provide the investors with the same amount of income as they would have had if the loan was still in place.

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