Commercial Mortgage - Interest Rates

Interest Rates

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. This must not be confused with the typical residential loan which uses the term to denote a 30 year term mortgage that comes with a rate fixed for 30 years. Most commercial loans have fixed periods between 3 and 10 years. The biggest factor that determines this is the source of funds. Many banks borrow their money to lend from the Federal Government with a wholesale cost and repackage the money for retail lending. Since the Fed Rate can change every 3 months or so, banks typically do not want to run the risk of their funds costs exceeding the income derived from interest through a loan made to consumer. These loans are typically based on the yields of treasuries, swaps, corporate bonds, or CMBS rates. Loans can also be variable or capped. These rates are usually based on an index such as LIBOR.

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 carries a higher interest rate due to the higher risk of not being able to recover all losses should the loan default.