When the Lowest Rate Isn’t the Best Option for a Commercial Loan

When people talk about getting the best loans for commercial and real estate endeavors, they're often talking about finding the lowest rate commercial mortgage. However, while the interest rate is a significant consideration when applying for commercial loans, it isn't the only one, and there are even times when it’s better to opt for a loan with a slightly higher rate in order to realize other advantages. In fact, here are three instances in particular when you might not want to choose the investment loan solution with the lowest rate.

1.    When you need greater flexibility

Traditional banks are typically able to offer the lowest rates on commercial loans. However, their solutions are less likely to offer the flexibility man investors need.

Consider the investor who wants to refinance their existing mortgage and access a sizable portion of the equity built up in the property. A bank may offer the lowest interest rate on the transaction, but they might also place more restrictions on the amount of cash the investor can access and the ways in which they could use it.

Non-bank lenders may offer higher interest rates, but they also loosen some of these restrictions for borrowers. Ultimately, investors will have to decide what they value most: paying the lower rate or getting more flexibility.

2.    When you are pressed for time

Another issue with bank financing is that it usually takes longer for loans to close. For some borrowers, an extended transaction timeline is nothing more than an inconvenience. However, there are many investors who absolutely need their commercial loan to close in a matter of weeks, or even days.

The need for a quick closing can arise during purchases or refinances. In the case of a purchase, a seller may be threatening to put their property back on the market if the buyer cannot produce the necessary funds fast enough. Timing can be crucial during a refinance if the borrower is facing an imminent maturity and balloon payment.

While a bank may take months to fund a loan, alternative financing options, such as hard money lenders, can provide funding in a matter of days. The difference of course is that the hard money loan will include a significantly higher interest rate.

Again, the speed vs. rate decision should ultimately come down to the investor’s specific needs.

3.    When you cannot provide sufficient documentation

Investors and other self-employed individuals often have difficulty providing the tax return documentation banks typically require before approving a commercial loan.

Sometimes an investor is simply not able to provide the documentation due to the nature of their business. In other cases, the investor would prefer not to provide tax returns because they are not an accurate reflection of the investor’s current financial situation.

Regardless of the reason, investors who are not able to provide sufficient documentation are typically unable to secure bank financing.

Fortunately, reduced documentation solutions do exist. Some alternative lenders offer loan programs with fewer documentation requirements, while others offer a stated income approach. As one might imagine, these types of loans come with a higher interest rate as well.

Investors considering their options should decide how serious their documentation concerns really are. If providing tax returns and other documentation is simply an inconvenience, then the higher rate may not be worthwhile. But if documentation issues are causing denials from various lenders, then an alternative solution may be vital.

Securing the best interest rates for commercial loans is often at the forefront of borrowers’ minds – for good reason. But there are times when the mortgage with the best rate isn't the best choice. When you want the best commercial loan interest rates and terms, contact Investment Property Loans to discuss your options.