Finance Roll

Commercial mortgages aren't usually full term loans. By this, I mean that it is pretty rare for a loan to be paid off over its term. Instead, most commercial financing is refinanced for one reason or another well before the loan matures. In this article, we take a look at how the refinancing process works in the commercial arena.

The average commercial mortgage is very different from residential personal loans in many ways. One is the purpose. Whereas a person might expect to own a home for such a long time that they could pay it off, the same is not true with a commercial mortgage. Not even close. Whereas you might voluntarily choose to refinance your home to pull out money to add a new room, commercial loans do it more as a requirement.

Every commercial mortgage is different. That being said, the most common approach is what is known as the balloon/amortization model. In this model, we find a loan set with a relatively short term followed by a balloon payment. The loan payments, however, are amortized over a longer period of 25 to 30 years. So, does anyone expect the balloon payment to be made by the borrower out of their profit? No.

The goal with these loans is much like the national debt - to roll it. The number of commercial mortgages that are paid off over the course of their full term with borrower money can probably be counted on a single hand. The better and accepted approach is to refinance the mortgage when it is advantageous based on rates and circumstances. If an opportune time doesn't occur during the term of the loan, bridge loans or other temporary financing is often used to bridge time until better rates come on line.

While refinancing is expected in the commercial loan market, that doesn't mean it is just a matter of snapping one's fingers to get a new loan. No, it takes just as much work and just as much preparation as when the original loan process was undertaken.