Mortgage financing is the process of placing a mortgage on a house and lot or on a commercial property for the buyer of that property. The mortgage loan financing has two principal objectives.
It can serve as a revenue-generating activity for the lender. It can also be used to refinance the mortgaged property to have more favorable terms of payments, or to establish a line of credit to use for running a business.
Commercial mortgages are loans made for buying structures like the office buildings, health care facilities, retail outlets and apartment complexes. Regardless of the commercial property, the buyers need additional funding to complete the transaction.
During such time, the lender makes money off the interest on the loan. If the borrower has failed to make payments on the commercial loan, the lender reserves the right to start foreclosure proceeding and seize the mortgaged property. Generally, the interests paid on commercial mortgages are tax deductible.
If you plan to apply for a commercial mortgage, you will be given two different types of loan, namely the fixed rate loans and the variable rate loans. These types of loans are applicable for residential and commercial mortgages.
When you choose a fixed rate for your mortgage financing, the interest agreed to, remains in effect, until the loan is full amortized. A fixed rate is a better option, if the bank prime rate increases, pushing basic rates higher. You have always the option to refinance your mortgage should the interest rates go down below your fixed rate.
When the prime rate goes up, the variable loan rates will also go up. Make certain that you understand how variable rates are determined. Find out from the lender how often the variable rate fluctuates. Many people with variable rate loans in the past have had their home foreclosured, because their monthly payments went beyond their budget.
As long as the interest rate on the variable mortgage decreasing, you are at an advantage. You need to worry though if the interest rates increase. When such thing happens, you have to make sure that the monthly payments are still affordable.
There are also mortgage financing where the rate is fixed for the first few years, and then changes into a variable rate loan. In applying for commercial mortgages, make sure that you understand the Early Redemption Charge or ERC.
The Early Redemption Charge is a penalty fee charged to the borrower when he decides to pay the loan in full before its due date. The lenders lose money when the loan is paid in full sooner than the terms applied for.
Having an Early Redemption Charge on your mortgage financing is a common practice among the US lenders. When you see an ERC in print, try to negotiate it with your lenders. If you are not successful, try your commercial mortgage application with another lender.
Mortgage financing is a serious undertaking. It is an investment that needs careful planning. Be alert when you sign the documents. Ask all the questions you have in mind, and negotiate to your advantage.