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  • Writer's pictureColin Dubel

Different Mortgage Loan Structures & Their Advantages & Disadvantages

There are several types of mortgage loan structures available for commercial real estate properties. Here are some of the most common ones:

  1. Fixed-Rate Mortgages: These loans have a fixed interest rate over the entire term of the loan. This means that the borrower's monthly payment will remain the same throughout the life of the loan, providing stability and predictability.

  2. Adjustable-Rate Mortgages (ARMs): These loans have an interest rate that adjusts periodically based on a predetermined index, such as the prime rate or LIBOR. The borrower's monthly payment may fluctuate over time, depending on changes in the index.

  3. Balloon Mortgages: These loans have a fixed interest rate for a certain period, typically 5 to 7 years, followed by a large payment, or "balloon payment," due at the end of the term. Borrowers who opt for a balloon mortgage usually plan to sell or refinance the property before the balloon payment is due.

  4. Bridge Loans: These loans are short-term financing options designed to "bridge" the gap between the purchase of a new property and the sale of an existing property. Bridge loans typically have higher interest rates and fees than other types of loans.

  5. Commercial Mortgage-Backed Securities (CMBS): These loans are packaged together and sold as securities to investors. CMBS loans are typically structured with a fixed interest rate and a balloon payment due at the end of the term.

  6. SBA 7(a) loans: These loans are offered by the Small Business Administration (SBA) to small business owners who want to purchase or refinance commercial real estate. SBA 7(a) loans typically have lower down payment requirements and longer repayment terms than other types of loans.

  7. Mezzanine Loans: These loans provide additional financing to fill the gap between the borrower's equity and the primary mortgage loan. Mezzanine loans are typically unsecured and have higher interest rates and fees than other types of loans.

It's important to note that the availability of these loan structures may vary depending on the lender and the specific commercial real estate property in question.


Advantages & Disadvantages


Each type of commercial real estate mortgage loan structure has its own advantages and disadvantages. Here are some key considerations for each:


Fixed-Rate Mortgages

Advantages:

  • Provides stability and predictability with a fixed interest rate and monthly payment.

  • Easy to understand and budget for.

Disadvantages:

  • May have higher interest rates than other loan types.

  • Limited flexibility to take advantage of falling interest rates.

Adjustable-Rate Mortgages (ARMs)

Advantages:

  • May offer lower initial interest rates and monthly payments.

  • Can be beneficial if interest rates decrease.

Disadvantages:

  • Interest rates and monthly payments may increase over time.

  • Can be unpredictable and difficult to budget for.

Balloon Mortgages

Advantages:

  • Can provide lower monthly payments during the initial term of the loan.

  • Can be beneficial if the borrower plans to sell or refinance before the balloon payment is due.

Disadvantages:

  • Balloon payment can be a significant financial burden if the borrower is unable to sell or refinance.

  • Typically have higher interest rates and fees than other loan types.

Bridge Loans

Advantages:

  • Provide short-term financing to bridge the gap between the purchase of a new property and the sale of an existing property.

  • Can be beneficial if the borrower needs to act quickly to secure a new property.

Disadvantages:

  • Higher interest rates and fees than other loan types.

  • May have limited repayment options and a short repayment term.

Commercial Mortgage-Backed Securities (CMBS)

Advantages:

  • Can provide financing for larger commercial real estate transactions.

  • Can be beneficial if the borrower wants to diversify risk among multiple lenders.

Disadvantages:

  • More complex and difficult to understand than other loan types.

  • Typically have higher interest rates and fees than other loan types.

SBA 7(a) loans

Advantages:

  • Lower down payment requirements and longer repayment terms than other loan types.

  • Can be beneficial for small business owners who want to purchase or refinance commercial real estate.

Disadvantages:

  • May have more stringent eligibility requirements and longer approval times than other loan types.

  • May require the borrower to provide additional collateral.

Mezzanine Loans

Advantages:

  • Can provide additional financing to fill the gap between the borrower's equity and the primary mortgage loan.

  • Can be beneficial if the borrower does not have sufficient equity for a conventional loan.

Disadvantages:

  • Typically have higher interest rates and fees than other loan types.

  • May require the borrower to provide additional collateral or personal guarantees.


If you have any questions about this article or would like to discuss a scenario of your own with our team, please feel free to contact Colin Dubel at colin@harborwestcommercial.com or 949-735-6415.

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