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Interest Rate Caps in Commercial Property Loans
An interest rate cap is used to limit the risk on a floating rate commercial property loan. A floating rate property loan has a variable interest rate, borrowers usually opt for this type of loan during periods of low-interest rates, because if the interest rate decreases further than the borrower benefits. A floating interest rate can also increase and that may be a huge financial risk if it increases rapidly or by too much. For this reason, borrowers try to cap the amount by which interest on the loan increases.
What are Interest Rate Caps in Relation to Floating Rate Commercial Property Loans?
An interest rate cap is used to limit the risk on a floating rate commercial property loan. Since a floating rate property loan has a variable interest rate, borrowers usually opt for this type of loan during periods of low interest rates. This is because if the interest rate decreases further, than the borrower benefits. A floating interest rate can also increase, potentially creating a huge financial risk if it increases rapidly or by too much. For this reason, borrowers try to cap the amount by which interest on the loan increases.
The interest rate cap may apply during a specific period of the loan or its entire lifetime. An interest cap gives the benefits of potentially lowered rates should they decrease and the security of a ceiling should they increase. For example, a borrower can get a 10-year commercial property loan which charges 4% interest with an interest rate cap of 7%. The interest rate can go up or down but will not go above 7%.
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Related Questions
What is an interest rate cap in a commercial property loan?
An interest rate cap is used to limit the risk on a floating rate commercial property loan. Since a floating rate property loan has a variable interest rate, borrowers usually opt for this type of loan during periods of low interest rates. This is because if the interest rate decreases further, than the borrower benefits. A floating interest rate can also increase, potentially creating a huge financial risk if it increases rapidly or by too much. For this reason, borrowers try to cap the amount by which interest on the loan increases.
The interest rate cap may apply during a specific period of the loan or its entire lifetime. An interest cap gives the benefits of potentially lowered rates should they decrease and the security of a ceiling should they increase. For example, a borrower can get a 10-year commercial property loan which charges 4% interest with an interest rate cap of 7%. The interest rate can go up or down but will not go above 7%.
How do interest rate caps work in commercial property loans?
An interest rate cap is used to limit the risk on a floating rate commercial property loan. Since a floating rate property loan has a variable interest rate, borrowers usually opt for this type of loan during periods of low interest rates. This is because if the interest rate decreases further, than the borrower benefits. A floating interest rate can also increase, potentially creating a huge financial risk if it increases rapidly or by too much. For this reason, borrowers try to cap the amount by which interest on the loan increases.
The interest rate cap may apply during a specific period of the loan or its entire lifetime. An interest cap gives the benefits of potentially lowered rates should they decrease and the security of a ceiling should they increase. For example, a borrower can get a 10-year commercial property loan which charges 4% interest with an interest rate cap of 7%. The interest rate can go up or down but will not go above 7%.
Your interest rate will depend on your loan-to-value ratio (LTV), type of business, credit score, and overall financial health and stability. In addition to a 20% - 30% down payment, you will also need to pay other upfront fees, like:
- Property appraisal
- Survey fees
- Legal Costs
- Loan origination
The Commercial Loan Broker helps the borrower understand the loan and its guidelines, prepares a loan application that can increase your chances for success, and represents the borrower’s interests throughout the process.
What are the benefits of an interest rate cap in a commercial property loan?
The greatest benefit of an interest rate cap in a commercial property loan is that it limits the risk of a floating rate loan. Since a floating rate loan has a variable interest rate, borrowers usually opt for this type of loan during periods of low interest rates. An interest rate cap gives the benefits of potentially lowered rates should they decrease and the security of a ceiling should they increase. For example, a borrower can get a 10-year commercial property loan which charges 4% interest with an interest rate cap of 7%. The interest rate can go up or down but will not go above 7%.
What are the risks associated with an interest rate cap in a commercial property loan?
The main risk associated with an interest rate cap in a commercial property loan is that the interest rate could increase significantly at the end of the interest-only period when you are required to start paying both principal and interest. Additionally, if the property’s value decreases, you could find yourself underwater on your loan – owing more than the property is worth. Before taking out an interest-only loan, be sure to speak with a qualified commercial real estate broker to discuss all of the risks and benefits associated with this type of financing.
What are the different types of interest rate caps in commercial property loans?
Interest rate caps are used to limit the risk on a floating rate commercial property loan. The interest rate cap may apply during a specific period of the loan or its entire lifetime. An interest cap gives the benefits of potentially lowered rates should they decrease and the security of a ceiling should they increase. For example, a borrower can get a 10-year commercial property loan which charges 4% interest with an interest rate cap of 7%. The interest rate can go up or down but will not go above 7%.
The different types of commercial loans and their rates are as follows:
Loan Type Interest Rate Term Best For Conventional Loan 4.5% - 5.5% 5 - 25 years Investment properties, owner-occupied properties, and properties in need of significant repairs Government-Backed Loan 3.5% - 4.5% 5 - 25 years Owner-occupied properties, investment properties, and properties in need of significant repairs Portfolio Loan 5.0% - 6.0% 5 - 25 years Owner-occupied properties and investment properties SBA 7(a) Loan 6.5% - 7.5% 10 - 25 years Owner-occupied properties, investment properties, and businesses in need of working capital SBA 504 Loan 4.0% - 5.0% 10/20/25 years Owner-occupied properties and businesses in need of long-term, fixed-rate financing USDA 538 Loan 3.5% - 4.5% 10 - 30 years Owner-occupied properties in rural areas Bridge Loan 7.0% - 8.0% 6 - 24 months Investment properties and properties in need of significant repairs Mezzanine Loan 8.0% - 9.0% 1 - 5 years Properties that need additional financing beyond a first mortgage Construction Loan 5.0% - 6.0% 1 - 3 years Properties that are being built or renovated USDA 538 Loan 3.5% - 4.5% 10 - 30 years Owner-occupied properties in rural areas Life Company Loan 4.0% - 5.0% 5 - 25 years Owner-occupied properties and investment properties Fannie Mae Loan 4.0% - 5.0% 5 - 25 years Owner- How can I find the best interest rate cap for my commercial property loan?
The best way to find the best interest rate cap for your commercial property loan is to compare different loan products from different lenders. You can use online commercial loan calculators to get an estimate of the interest rate cap for different loan products. For example, you can use Multifamily Loans' Cap Rate Calculator to get an estimate of the cap rate for your loan. Additionally, you can work with a professional financial advisor to come up with a plan that makes the most sense for your business goals and your budget.
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