What are the Differences Between Commercial and Residential Mortgages?
One major difference between commercial and residential loans is the risk involved. Commercial loans are usually more expensive than residential loans. This puts more financial risk, pressure, and uncertainty on the lender. Therefore, commercial mortgage brokers have structured the commercial loan standards and practices differently than those of the residential loan process. In some ways, a commercial mortgage is similar to a residential loan, but there are some major differences.
- A Larger Down Payment Is Required on a Commercial Loan
In most residential mortgage transactions, the lender will ask for a 20 percent down payment. However, there are a number of loan programs that waive this requirement. In fact, potential homeowners can purchase a home after only putting down three to five percent. The commercial loan industry, however, is more careful. Most commercial mortgage brokers require a substantial amount of equity to be put down before they will process the loan request. These mortgage brokers want to make sure they have a very good chance of seeing their money again and receive a positive return on their investment via interest.
- Interest Rates are Higher for Commercial Loans
Due to a limited secondary market, the risk involved, and the high price for commercial properties, interest rates tend to be higher on commercial loans. What’s more, commercial mortgages are offered at shorter terms so that the lender can recoup their capital investment sooner. On the other hand, there is a large secondary market for residential properties. Banks can easily transfer the loan to mortgage investors and recoup their capital investment. Therefore, they tend to offer competitive interest rates on residential loans.
- Commercial Loans Often Involve Balloon Payments
A balloon payment mortgage does not amortize over the term of the loan, and therefore, leaves a hefty balance due at the end of the term. These are common on commercial loans, but rarely seen on a residential mortgage.
Whether you’re in the market for a residential or commercial loan, the mortgage experts at Pioneer West Acceptance Corp. can get you the financial assistance you need. Call us at (604) 987-1420 to schedule a consultation today.
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