When negotiating and structuring a loan, the first questions we hear from borrower’s and primary focus of discussion nearly always center around the prospective lender’s rates and fees. While rates and fees will generally dictate the cost of the loan, not all loans are created equal – beyond the interest rate, there are several other important loan terms that borrowers should be aware of.
Unlike traditional home mortgages, which are relatively uniform, commercial and bridge loans often include a wider variety of terms that can be of high importance to a real estate investor and the ultimate success of their project.
Whether working with a bank or a private money lender, understanding the following loan terms will assist a real estate investor in structuring a loan that is the best fit for their needs. While some lenders may advertise low rates and fees, borrowers should be wary of other loan terms that may cost them significant amounts of money down the line. Commercial real estate loans can be complicated transactions, so seek out a lender who will take the time to answer any questions you may have.
Loan Term Length
The length of the loan term offered is extremely important when considering the timeline to completion or refinance of a short-term project. Borrowers often overestimate their ability to complete projects on very quick timelines, to take advantage of lower loan fees for 4-9-month loans, only to find themselves paying expensive extension fees when the project takes longer than expected.
Whether a loan is amortized, and on what schedule, or if it is interest-only, will have a significant impact on the monthly payment. For short-term loans, interest-only payments will preserve cashflows that may be necessary for other property related expenditures.
Fixed versus Adjustable-Rate
As interest rates continue to rise, many private lenders have begun offering more adjustable-rate loans. Adjustable-rate loans start lower, which may be advantageous in some situations, but borrowers should carefully consider how often their rate may increase in the future, and by how much.
Prepayment penalties are common in commercial loan documents and may result in a steep cost to the borrower for paying off a loan prior to maturity. While this may not be an issue when financing commercial properties, if the borrower anticipates holding for the foreseeable future, these clauses should not be overlooked – especially when developing for-sale products.
At Juniper Capital we take care to educate our borrowers, and structure loans that will allow them to achieve their goals and make their projects a success. We specialize in Seattle real estate loans, private construction loans, and more. We are always happy to answer questions and think outside-the-box to develop creative loan structures. Give us a call to start the conversation today.