3 Loan Terms All Commercial Real Estate Buyers Should Know
Taking out a loan for the first time, whether it is for a residential or commercial property, can be confusing. This is especially true if you are not familiar with real estate terms. Below are some of the most important terms anyone who is taking out a mortgage should learn before talking to a mortgage manager.
Intermediate and Long-Term Loan
There are two basic loan lengths that are offered by lending institutions in the United States. The first of these is an intermediate-term loan. These loans can last up to three years on average but can be paid off sooner. Taking out an intermediate-term loan is better for smaller amounts, or if the lender knows they will be coming into a good amount of money soon.
Long-term loans usually last between five to twenty years but can last longer, depending on the mortgage amount and other factors. Taking out long-term loans is the better option for borrowing large sums of money or if the person taking out the loans expects to be able to pay off a smaller amount of money over a longer period of time.
Amortized loans are the most popular loan types for both residential and commercial real estate. With this type of loan, the loan amount (plus interest and other applicable fees) is the same every month until the loan is paid off, making payments consistent from opening to close. This loan type is best if you are planning on taking out a long-term loan but can also be applied to intermediate-term loans.
Balloon loans are best for intermediate-term loans but can also work well for long-term loans lasting less than ten years. The beginning payments are the same amount each month. However, since the loan needs to be paid off sooner, the last mortgage payment will be a large lump sum.
For example, if someone takes out a $50,000 loan, their payments might be $1000 a month for a few years, and then the mortgage payer would pay the remainder off a few years later, no matter how large the remainder is. This type of loan is only suitable for people who know they will be coming into money by the end of the loan term.
Knowing these terms can make any borrower more financially savvy. Keep these in mind the next time you meet with a mortgage manager.