Commercial real estate loans are usually used to buy, refinance, rehabilitate, or construct commercial, industrial, and other non-owner-occupied properties. These include hotels, office buildings, warehouses, medical facilities, multi-unit rental buildings, and land where you can build these kinds of property. You can also use commercial mortgages to purchase and develop land on which you’ll construct homes for sale. Lenders usually underwrite commercial loans based on the expenses and the income that a property will generate.
Read on to understand how lenders calculate real estate interest rates.
Commercial Real Estate Interest Rate: What Is It and How Is It Calculated?
Commercial mortgage interest rates are essentially rates your lender will charge you if you borrow to refinance, construct, or purchase a commercial property.
There is no single way of calculating interest rates. It all depends on the platform and loan product you choose. Private money lenders, debt funds, and banks use varying methods when calculating interest rates. However, most lenders use these common indexes when calculating interest rates:
The Federal Reserve regulates and calculates all these indexes; thus, market conditions can impact interest rates. For instance, due to market conditions, the Federal Reserve can increase or decrease the interest rates. So indexes change continually.
Factors Affecting Commercial Real Estate Interest Rates
The existing economic conditions greatly impact commercial mortgages’ interest rates. Generally, interest rates are set based on the prime rate. The prime rate refers to the rate lenders charge clients for credit. Lenders set their own prime rates, but most banks rely on the rate that The Wall Street Journal’s compilation of the 30 largest banks in the country. In turn, the banks’ decisions are largely based on the Federal Reserve Board’s Federal Funds Target Rate, which can be adjusted to limit inflation.
As a borrower, your profile, including your location, age, income, and expenses, impact the rates you’ll pay for a commercial loan. Borrowers with higher incomes tend to attract lower interest rates.
Tenure of the Loan
The tenure of your commercial mortgage loan will impact the interest rates you’ll pay. Long-term loans attract lower rates because lenders regard these loans as lower risk.
Your Credit Score
Generally, borrowers with a high credit score pay lower interest rates. A good credit score indicates to borrowers that you pose a lower risk. However, if you don’t have the greatest credit score, you can opt for a commercial mortgage lender that provides financing based on the value of your property rather than your credit.
The Loan-to-Value Ratio (LTV)
This figure measures the amount of financing against the appraised value of the property. To calculate LTV, divide the loan amount by the property’s purchase price or appraised value (use the lesser of the two). The lower your LTV is, the more favorable your financing rates will be because having more stake in property equals a lower risk for the lender.
What are Los Angeles Commercial Mortgage Loan Options?
- Conventional commercial real estate loans: These are offered by lenders with terms of up to 30 years.
- Commercial bridge loans: The loans bridge financial gaps up to when you’ve found long-term financing, and their terms are usually at most two years.
- Hard money loans: These are bridge loans that private lenders provide.
If your credit is less than perfect, you’ll likely need to borrow from a private lender. At Fidelity Mortgage Lenders, Inc., we will provide you with a customized commercial real estate loan based on the value of your property. Contact us today to learn more.