Commercial Equity Line Vs Commercial Second Lien Position Loan with Fixed Rate

Many owners in the commercial real estate industry are unaware that a secondary lien exists, especially in this rough market. But yes, for the right scenario, borrowers can still secure these second lien loans. These programs are geared towards smaller projects, but with a real estate value of less than $3,000,000. Loan amounts for commercial mortgages or commercial secondary mortgages are capped at $500,000.

Both programs can be used by either investors or business owners, although business owner loan applications are easier to fund (because there are no property-specific debt coverage ratios to contend with).

In terms of which lending program is the better option, we generally recommend the fixed rate program. First of all, the rate is fixed between 5, 10 or even 15 years. This certainty that the interest rate will not change is valuable in this uncertain market. With inflation looming, it seems certain that the Fed will hike rates again soon, putting many borrowers in pending loan programs in painful situations.

The interest rate for a commercial second mortgage is often the same or only slightly higher than for a line – with the security of being fixed. For example, at the time of this writing on August 7, 2008, the interest rate on a $500,000 loan amount is approximately Prime plus 1.5%, or 6.5%. While the 5-year fixed interest rate for 30-year amortization loans is 6.9%.

In addition, underwriting a second commercial mortgage is often a little easier than a commercial framework loan.

The main benefit of the commercial equity line of credit is having capital that is available and ready. As with a home equity line, the borrower pays no interest on the line unless money is withdrawn and used. Often, borrowers who want the line use it to recapitalize a business, rehabilitate or renovate another property, or use the money from the line as a kickback to buy another property.