Asking questions to your commercial mortgage lender is always a good practice.
Consider this: you enter into a contract assuming a 25% down payment, only to discover that you’ll need to put down 35%. Or that you do not qualify for the loan on your own and will need to locate a co-sponsor. Or that the lender requires a 6-month reserve, something you did not expect.
In this situation, such shocks might lose you a bargain. And you don’t want surprises like this while closing a sale.
You should ask your lender as much as you can, if possible. So, here are the top 6 questions you need to ask your commercial mortgage lender that is non-negotiable.
1. What is the interest rate?
2. What are the fees?
3. How long is the loan term?
4. What is the loan-to-value ratio?
5. What is the amortization schedule?
6. What is the pre-payment penalty?
Let’s jump in and discuss each of those in detail below.
What is the interest rate?
The interest rate will determine your monthly payments. So, you’ll want to ensure you understand the offered interest rate and its type. You should also ask if the interest rate is its actual value after they’ve added lender expenses.
Knowing a loan’s annual percentage rate (APR) is also crucial, and you can get this by dividing the interest rate plus all lender expenses by loan length. Yet, we can’t know an APR rate for an adjustable mortgage because not all brokers compute APR similarly.
An APR also does not take into account early payoffs. If your interest rate is adjustable, secure the change frequency with your lender. Also, check out the max yearly change, the highest rate, index, and margin.
What are the fees?
Lenders will charge origination, appraisal, and closing costs. Ask all about the fees so there are no surprises down the road.
A loan comprises lender and third-party vendor expenses, including appraisals, credit reports, and title policies. Also, your lender might include pest inspection reports, escrow (if applicable), recording fees, and taxes.
Your lender should estimate these fees on a document known as the loan estimate. Don’t worry; federal law requires brokers to provide this info to you.
Some are crafty enough to “underwrite” parts of the loan to surprise you with hidden fees. Years of your life might depend on the answers you get, from unexpected costs to the correct form of loan for you.
How long is the term of the loan?
The loan term is the time you have to repay the loan. Most commercial mortgages have 5 to 25 years terms, but some lenders may offer terms as long as 30 years. Your credit history and equity sources will also impact what loan term they will approve for you.
Your monthly payments may look smaller if the term is longer. But, take note of the interest rate (as mentioned above). You don’t want to end up paying off more than half of your loan as interest only.
It’s also helpful to know what loan you want to avail. Know if it’s a fixed-rate or adjustable-rate mortgage. Once committed to a loan and the length of the term, you can’t change it.
What is the loan-to-value ratio?
The loan-to-value (LTV) ratio is the amount of money you may borrow with the actual worth of your home. In other words, it’s the loan amount divided by the property’s value. For instance, if you’re borrowing $100,000 to buy a property worth $200,000, your LTV would be 50%.
Why is it important? A high loan-to-value ratio means paying higher equated monthly installments. Some lenders recommend taking private mortgage insurance against larger loans. Hence, it would result in higher EMIs.
A lower LTV ratio leaves enough room for budgeting other expenses. And as long as you have the funds to cover the down payment, the LTV ratio is essential for you to know.
What is the amortization schedule?
The amortization schedule shows how much principal and interest are due each month. Be sure to ask for a copy of the amortization schedule to see how your charges apply. It’s your protection against lenders who might change policies during market downturns.
Also, you may save money and repay your loan faster by taking advantage of amortization. There are three ways to pay off loans more quickly:
- Paying a little more each month,
- making a lump-sum payment, and
- paying half of your mortgage every two weeks
Your goal is to reduce your interest expenses and shorten the effective term of your loan. Make sure your lender allocates the payment to the principal amount. It’s in these strategies that having a copy of the amortization schedule becomes handy.
What is the pre-payment penalty?
Some lenders could charge a pre-payment penalty if you repay the loan early. This fee can add up, so ask about it before signing on the dotted line.
But, know that several places no longer permit pre-payment penalties. Suppose you pay off your loan early. The lender can recover unpaid interest through selling the property or refinancing.
Some penalties are only applicable for the first two to five years of the loan, so ask for clarity. Ask about the conditions and if the penalty would apply if you refinance with the same lender later.
Mortgages and mortgage terminology are not for everyone. It’s okay to ask for clarification even if you think you already know and want to get all the finer points.
And that’s our six questions to ask your commercial mortgage lender when taking a loan. Knowing these will help you in any business venture or investment you want to pursue. Hence, it takes you a little bit closer to your financial freedom.