Interest Only Commercial Mortgages
A Commercial Mortgage or Commercial Property Loan is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time. Interest Only Commercial Loans are offered on fixed rate or adjustable rate mortgages as wells as on option ARMs. At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.
You won’t reduce the principal balance during the interest-only term. However, it could help you close on the commercial property you desire, instead of only settling for a lower-end property.
Since you’ll be qualified based on the interest-only payment, and may possibly refinance before the interest-only term expires anyway, it could be a way to effectively lease your commercial property now and invest the principal portion of your payment elsewhere.
For example, if you borrow $1,000,000 at five percent (5.00%), using a 30-year amortization, your monthly payment would be $5,368. On the other hand, if you borrow $1,000,000 at five percent (5.00%) with a 5-year interest only payment plan, your initial monthly payments would only be $4,167. This saves you $1,201 per month or $14,412 per year in payments. However, when you reach year six, your monthly payments will jump once the loan is re-amortized. Hopefully, the property income will have risen accordingly to support the higher payments or hopefully you have refinanced your commercial property loan by that time.
Mortgages with interest only payment options may save you money in the short-run, but they may actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.
Commercial Properties and Commercial Property Borrowers with sporadic incomes may benefit from interest-only commercial loans. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower may pay interest-only during lean times and use bonuses or income spurts to pay down the principal during better times.