What Is a Commercial Mortgage?

While residential loans make up the vast amount of loans written, commercial mortgages are just as important. So, what is a commercial mortgage?

At its core, a commercial mortgage is the very similar to a residential loan. It is a loan made using property as collateral to secure the loan. Obviously, the prime difference is the property in question is real estate of a business nature instead of a home to live in or land to build on.

By its very nature, a commercial mortgage is a transaction sought by a business, not an individual. In practical terms, this means the business will apply for the loan, and the credit worthiness of the business is the primary issue as well as its revenues. In general, evaluating business credit is more complicated than personal credit.

Another area where commercial mortgages differ from residential ones has to do with the term. The term simply refers to the number of years over which the loan is repaid. With residential loans, the term is typically 30 years. When it comes to commercial mortgages, the term is handled much differently. Most commercial mortgages come in the form of balloon loans. This means they have a shorter term of say ten years for example. At the end of the loan period, the loan is not paid off by the monthly payments made. Instead, a percentage of the original loan amount comes due and must be paid as a lump sum payment.

A commercial mortgage is often considered riskier than a residential loan. As a result, lenders adapt to the risk by requiring the borrowing business pay higher interest rates. The rates can be as high as one to two points more than the prevailing residential rate at that time. The interest is tax deductible much the same way as with a residential loan.

What is a commercial mortgage? It is a way to fund business real estate purchases. While the process works much like a personal real estate loan, it is generally slightly more expensive and a bit more complex.

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