Commercial Mortgages Demystified: Fixed-Rate vs. Adjustable-Rate

Fixed-rate and adjustable-rate mortgages are two common types of loans used to finance commercial real estate properties. These two mortgages have different interest rate structures and the level of risk they entail. Let’s continue reading to learn more about them.

What Is a Fixed-Rate Commercial Mortgage?

In a fixed-rate commercial mortgage, the interest rate remains constant throughout the loan term. Fixed-rate commercial mortgages are known for their reliability and are commonly used for several commercial properties, including office buildings, retail spaces, industrial facilities, and more.

Benefits of Fixed-Rate Commercial Mortgage

The benefits are as follows –

  • Interest Rate Stability: In a fixed-rate commercial mortgage, the interest rate remains constant throughout the loan term.
  • Predictable Monthly Payments: With a fixed-rate mortgage, borrowers make consistent monthly payments that include both principal and interest.
  • Long-Term Planning: Fixed-rate mortgages are often chosen for long-term financing, as they provide certainty about the cost of borrowing over an extended period, typically ranging from 5 to 30 years.
  • Rate Lock: Borrowers can lock in a specific interest rate at the time of loan origination, which protects them from fluctuations in market interest rates.
  • Higher Initial Rates: Fixed-rate mortgages typically have higher initial interest rates than adjustable-rate mortgages.
  • Interest Rate Risk Mitigation: Fixed-rate mortgages are less susceptible to fluctuations, making them a suitable choice when interest rates are expected to rise.

What Is Adjustable-Rate Commercial Mortgage?

In an adjustable-rate commercial mortgage, the interest rate is not fixed but varies periodically based on specific financial indices or benchmarks. Unlike fixed-rate mortgages, where the interest rate remains constant for the entire loan term, adjustable-rate commercial mortgages come with adjustable interest rates that can change over time.

Benefits of Adjustable-Rate Commercial Mortgage

The benefits are as follows –

  • Interest Rate Variability: As the name suggests, an adjustable-rate commercial mortgage has an interest rate that can change periodically.
  • Initial Rate Period: These loans often start with an initial fixed-rate period, which can vary in duration (e.g., 3, 5, 7, or 10 years). The interest rate remains fixed and lower than typical fixed-rate loans during this initial period.
  • Rate Adjustments: After the initial fixed-rate period, the interest rate can adjust periodically (e.g., annually or every six months) based on changes in the chosen index. Borrowers may experience rate increases or decreases, leading to changes in monthly payments.
  • Interest Rate Caps: These typically have interest rate caps that limit how much the interest rate can increase during each adjustment period and over the life of the loan.
  • Lower Initial Rates: These often offer lower initial interest rates than fixed-rate mortgages, making them more attractive to borrowers looking for lower initial payments.
  • Interest Rate Risk: Borrowers assume interest rate risk can increase if market interest rates rise significantly. Conversely, payments may decrease if rates fall.

Fidelity Mortgage Lenders Can Help You with the Right Commercial Mortgage

The decision between a fixed-rate and adjustable-rate commercial mortgage should be based on a thorough evaluation of your financial situation and investment objectives. Consulting with a financial advisor or commercial real estate expert can provide valuable insights and help you make an informed decision. Fidelity Mortgage Lenders can help you choose the right fixed commercial rate mortgage according to your needs. Our experts are always available to help you with your commercial mortgage needs. Contact us today to get started.

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