30 Year Fixed Commercial

by : jeff rauth

'Is there really such a thing as a Commercial 30 Year Fixed?'

Absolutely. It is new to the market having been available for only a few years. It's very similar to the residential loan in that the rate is fixed for the full 30 years as well as the loan is fully amortizing.

The main benefit is clear - the borrower knows that they do not have to worry about rate increases in the future or more importantly that the borrower does not have to go through the expense and time of refinancing the loan again. The borrower can also pay down the mortgage by 20% per year; 90% financing is available for owner occupants (on purchases) and rates are pretty close to traditional bank financing (meaning within .1-.4%).

Going back to the point about not having to worry about refinancing a traditional loan in the future, the cost savings can be significant. If the borrower elects a typical 5 year fixed 20 year amortization loan they will 1 have to reoccur the costs EVERY 5 years and 2. If they are not careful amortization period will restart at 20 years over and over. The costs to reorder the appraisal ($2,000 - $5,000), update environmental reports ($1,000 - $2,000) and pay for title costs ($1,000 - $3,000) can add up fast. In addition, most banks will recharge their 1% bank fee on top of any processing fees they may charge as well.

'I've never heard of it before - How is this possible?'

The secondary market is the creator of this and other creative commercial mortgages. This is due to the differences in the secondary market as compared to the traditional system where banks essentially lent their own money (portfolio loans). So the banks source of capital was from deposits.

The secondary market on Wall Street creates much more diversification because the loan are securitized, pooled and sold in the form of mortgage backed securities. The pools are normally in the $100's of millions, and include 100's of individual loans from around the country and further diversified by being comprised of different building types.

'What's not to like?'

Currently, credit criteria is tightening as the residential subprime mess is corrupting other markets, which has eliminated some of the riskier aspects of this loan. Prepayment penalties can be higher as well which range from 5% for 5 years to 10% for 5 years. Rates can be slightly higher when compared traditional banks financing.