Lock In Mortgage Rate
Commercial Mortgage Rates
Commercial mortgage rates are mainly a combination of an index and margin that the bank charges. Borrowers should be careful about how the term sheets are written in the quoted rates. Below are a few suggestions on how you can protect yourself against bait and switch moves that some lenders still use the commercila mortgage rates.
First and foremost, a indices commonly used for commercial mortgage industry includes Prime Minister and 10 years exchequer. Lesser-known indexes such as five years or Swap FHLB indexes are becoming increasingly popular.
The margins are where the bank makes its spread. It is a very complicated process for banks to figure out what to charge as they basically have to predict future and take into account the probability of default, is sufficient to cover their costs, and of course try to make a profit. At the same time industry is very competitive and they have to price their loans "skinny" enough to get new borrowers.
The combination of the margin and the index is generally called the effective rate. That is what the borrower will use to calculate their payments and what they usually think of when they ask for rate quotes. For example, if a bank quoted you Prime plus 1% your effective rate would be 6% as the primary right now is at 5%.
The main proposal not to have your rate bumped up on you while your loan is in the process is to have both the margin and index clearly written on the term sheet. The opposite is just having the effective interest rate is quoted without mentioning that either the margin or index. If one or both go down, for example, you would not know and would not know that your rate should be lower. Lender may simply hold your course immediately, and you will not have any contact or really any way to know.
A worse scenario would be to have your rate increase during process. Rate locks are rare in the commercial mortgage industry so it is possible to finance the bank call you with bad news that your rate will be higher. In fact, as of this writing 5/8/8 it is not so uncommon at all, as banks constantly rethinking what they can and what they want to borrow at – Because of the credit crisis. And many will have the attitude of take it or leave it. More precisely, for if the margin and the index is not clearly known lender could mention any margin or index when challenge to "cover" his story.
Get it in writing or assume they will try bait and switch on your loan rate.
About the Author
Jeff Rauth is President of Commercial Finance Advisors, Inc 248 885-8797 or at SBA 7a Loans or commercial loan rates or commercial loan calculator