Examining Business Fixed Mortgage

By: jeff rauth

Business owners that own their commercial building need to take a hard look at the new commercial 30 year fixed program that has become available. It has some features that set it apart from the typical 5 year fixed, 20 year amortization bank loan.



First of all, as the name implies, this loan, just like the traditional residential 30 year fixed is fully amortizing over 30 years and the rate is fixed for the entire term. Further the program is designed for owner users (businesses that own the facility they operate out of) and is a suited for a broad range of building types, not just the typical office, industrial, retail. Properties like automotive, restaurants, daycares etc are acceptable.

Besides the obvious benefit of not having to worry about an adjusting rate or pending balloon, the cash flow savings can be a significant for a small business that is trying to reduce monthly costs. On average we see a 20% cash flow savings when compared to a 20 year amortization loan.

To be fair, the reduction in payment is due more to spreading out the loan, than a true savings, but many business owners are more concerned, especially in our struggling economy, on keep their monthly outlay down and cash flow up. Other benefits include ability to pay the mortgage down by 20% per year without incurring the prepayment penalty and that rates/fees are right in line with traditional loans.

How and why haven't you heard of the Commercial 30 Year Fixed before?

Couple of reasons. The evolving commercial secondary market is one of the sources behind 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.

The secondary market is different than the traditional system. Loans are instead "pooled" together and sold to investors in the form of bonds, creating greater diversification and less risk for the entities holding onto the loans. This diversification is one of the fundamentally differences, that enable major lenders to create and underwrite loans outside of the norm.

What are the negatives?

Few. Prepayment penalties are higher than traditional loans. Most banks will ask for a 5,4,3,2,1% while this loan may have a straight 5% for five year or as high as 10% for five years depending on the particulars. Interest rates are typically .1 - .4% higher than on traditional programs but the increase in amortization, as stated above, normally increase cash flow by 20%.

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