Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Types of Financing

In general, there are three types of financing: fixed-rate loans, variable-rate loans, and hybrid loans. The type of loan should not be confused with the loan's amortization. Type of loan refers to the overall structure of the financing, while amortization relates to how quickly the principle of the loan is repaid. In other words, you can have an interest-only or a 30-year amortizing fixed-rate loan and, similarly, have an interest-only or 30-year amortizing variable-rate loan.

Fixed-Rate Mortgages

Fixed-rate debt sets the interest rate for the life of the loan at the outset. As long as the loan is outstanding, the agreed-upon interest rate is the interest rate that the borrower pays. For commercial loans the interest rate is typically set as a spread over treasury bills. A lender's quote might be 100 basis points over the 10-year Treasury bill rate. If the Treasury bill rate for 10-year money is 4.50 percent, then the interest rate will be fixed at 5.50 percent for the entire 10-year loan term.

If the interest rate is set a few days prior to closing, commercial lenders will usually allow the borrower to “lock rate” (fix the interest rate) without posting additional money. However, if the borrower wishes to lock the rate 30 or more days prior to the anticipated loan closing date, then the lender usually requires that a rate-lock agreement be signed and that the borrower post an additional deposit, typically 2 percent, to cover any loss the lender might incur ...