We all are quite familiar with residential loans or mortgages. The whole idea is pretty simple, we put our personal property as collateral for the loan and get the money. But commercial real estate loans CRE is another game of finance. There are some basic similarities, but when it comes to terms and conditions, lenders are a bit more structured in the real estate finance setting.
So, if you want to know the main difference between Residential and Commercial Real estate loans, you have hit the right place. I will explain the main difference in detail. Shall we begin?
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Residential Vs. Commercial Real Estate Loans
Here are some points that create a distinction between both types of amortization loans.
Borrower
In the case of a residential loan, a borrower is an individual. He is a person who requires a home for renovation, construction, upgrades, or some other personal reason. As far as a commercial loan is concerned, the borrower is an entity aka shopping mall, hotel, restaurant, club, office, resort, etc.
Term and Period
Another major difference between both kinds is their terms. The residential loan is a pretty straightforward word. The term is set for 20-30 years and a borrower follows a fixed repayment schedule. On the flip side, you can get commercial real estate loans with 5 to 20 years while your loan amortization period will be longer than the term.
Loan to value ratio LTV for a commercial loan is 60-80 percent. However, if you go with a residential loan, your LTV ratio is more than 80 percent, and many times it reaches up to 100 percent.
Repayment of Loan
The most important thing you need to understand about both kinds of loans is their repayment schedule.
You can get a residential mortgage for 15 years, 20 years, and even for a fixed rate of 30 years. It means you pay fixed interest rates and the same payment regardless of the economic situation for up to 30 years.
EXAMPLES
Let’s suppose you take a home mortgage of $100,000 at a 3 percent rate for 30 years with a 20 percent down payment. Now you will make 360 installations of $515 every month and once all those payments are made, your property is transferred back to you right away.
On the flip side, if you take a $2 million commercial real estate loan at a 7 percent interest rate for 7 years then you will make a payment of 13306.4 per month for seven years. Since your commercial loan has a high amortization period, let’s say 30. Then at the end of 30 years, you will make a final or Baloon payment of $1836255.28.
You need to keep in mind that when you get a loan with a high amortization period then you need to deal with lower monthly payments at first and higher interest costs over the life of your loan. So, you need to be quite thoughtful while dealing with this kind of commercial real estate loan.