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When buying commercial property, you’ll likely need a commercial mortgage similar to a home mortgage. The difference is that unlike residential real estate, commercial real estate refers to property designated for business and the typical commercial real estate loan borrower might be a business owner, developer, or investor.

Commercial real estate loans can be used to finance a new project or to refinance existing projects and spaces. Commercial real estate loans work differently than residential mortgages in terms of structure, underwriting, interest rates, and fees.[1]

What is a commercial real estate loan?

Commercial real estate refers to any income-producing real estate that’s used for business purposes such as offices, retail spaces, hotels, and apartments. A commercial real estate loan is a mortgage secured by a line on a commercial property as opposed to a residential property, though they function more similarly to a residential mortgage than other types of small business loans.

A commercial real estate loan is typically used to purchase, build, refinance, or rehabilitate commercial, industrial, and other non-owner-occupied property including spaces like office buildings, multi-unit rental buildings, medical facilities, warehouses, or even vacant land on which these types of properties can be built. Unlike a residential mortgage in which the underlying asset is the primary residence, commercial real estate loans are underwritten based on the income and expenses that the property will generate. [1] [2] 

How a commercial real estate mortgage is calculated

Commercial mortgage interest rates are the rates your lender will charge you when taking out a commercial real estate loan. There’s no single way to calculate interest rates as it will depend on the platform and loan product chosen but regulators will tend to use one or more common indexes when calculating interest rates. Those indexes are regulated by the Federal Reserve based on market conditions, which means the Federal Reserve can increase or decrease the interest rates.

While indexes for interest rates change continually, commercial interest rates tend to be higher than those for residential loans – typically about 0.5% - 1% higher than the 30-year prime rate for mortgages. The repayment term is also usually shorter for commercial real estate loans which makes them somewhat more expensive than residential loans. Commercial real estate loans also come with closing costs, typically in the amount of 3% - 5% of the amount borrowed. [3] [4] 

Calculate your commercial real estate mortgage

Fees associated with small business property loans

Fees are a part of the equation in the commercial real estate mortgage calculator. A wide range of factors can affect what kinds of loan fees you could be on the hook for and how much they will cost you. The type of loan, the amount, the lender, and your credit history all play a part, and some lenders have their own unique fees but let’s look at some of the most common business loan fees. 

One fee you might see is the application or origination fee which is the fee charged for processing your loan application. Banks and online lenders rarely charge application fees and sometimes the origination fee is included in the total loan amount which means you’re basically borrowing the fee and repaying it with interest.

Servicing or processing fees are those the lender charges for performing a variety of activities like customer service or billing to manage and administrate the loan. Service fees are typically billed monthly or according to the loan repayment schedule and are usually charged as a percentage of the payment amount. Some lenders only charge a one-time service fee which is typically charged as a percentage of the total loan amount. Some lenders also charge an annual fee to keep your business line of credit active. Commercial real estate loans also come with closing costs which can include things like an appraisal, attorney, credit report, and recording fees. [5] [6] 

How to reduce commercial real estate loan costs

One way to reduce your commercial real estate costs is to make your payments on time as lenders will charge a late payment fee. The best way to avoid these types of additional fees is to make your loan payments on time, in full, and in the method preferred by your lender, i.e., using autopay.

You can certainly pay off your loan early but there can be prepayment penalties charged to borrowers who pay off their loan ahead of schedule. This fee may be included in the loan contract as a way for the lender to hedge against the interest fees they’re losing due to early repayment but many lenders don’t charge prepayment fees. If you think you might pay off your loan early, be sure to ask about prepayment fees.[6]

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[1] “What Is A Commercial Real Estate Loan? Steps To Get One", Erik J. Martin, (Accessed December 8, 2022).

[2] “Commercial Real Estate (CRE) Loan Definition, Types, Terms, , Rates,” Troy Segal, (Accessed December 8, 2022).

[3] “Understanding How Lenders Calculate Commercial Real Estate Interest Rates,” Fidelity Mortgage Lenders, Inc., (Accessed December 8, 2022).

[4] “Commercial Real Estate Loans: What You Should Know,” Casey Bond, (Accessed December 8, 2022).

[5] “The Most Common Business Loan Fees: Extra Costs To Watch Out For,” Chloe Goodshore, (Accessed December 8, 2022).

[6] “Types of Small Business Loan Fees,” Marianne Hayes, (Accessed December 8, 2022).

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