Commercial 30 Year Fixed Loan

By: Christopher Carter

A new commercial loan program that is similar to the traditional residential 30 year fixed. Loan is fully amortizing over 30 years and the rate is fixed for the entire term.

Relatively new to the industry, this loan program is turning heads. Primary benefit is obvious, knowing that you do not have to worry about future rate increases. Other less well know benefits include ability to pay down loan by 20% per year, 90% financing on purchases for owner occupants and rates/fees right in line with traditional loans.

As a comparison, traditional loans are fixed for 5 years and amortized over 20 years. At the end of the 5 years the loan balloons and rate is reset at market conditions.

"How? And why haven't I heard of it before?"

The evolving commercial secondary market is the source of this loan program (and others). Historically, banks originated and funded loans basically with their own money, primarily from deposits. They were (and still are) at direct risk of losing that capital should the borrower default on the loan.

The secondary market is different than the traditional system. Loans are instead "pooled" together creating greater diversification and thus less risk for the entities holding onto the loans (like insurance companies/pension funds). Pools are typically in the $100's of millions, comprised of 100's of individual loans spread out geographically and by different building types.

This diversification is one of the fundamentally differences, that enable major instructional lenders to create and underwrite loans outside of the norm.

"What are the negatives?"

Few. Prepayment penalties are slightly higher than traditional loans and rates can be higher on high loan to value scenarios. Although this is not a solid comparison, most bank financing only goes to 80% loan to value vs. 90% loan to value on this loan.

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