A commercial mortgage is a loan given to a borrower on the basis of real estate collateral. Commercial mortgages sometimes require additional collateral to secure the loan. This can be in the form of business equipment or inventory, personal or other properties, heavy machinery, or any asset of significant value.

The lender receives repayment of the commercial mortgage principal, along with interest, over the life of the loan. If the borrower defaults on repayment the lender the right to foreclose and take possession of the property, which was used for collateral. Unlike other short-term business loans, the term of a mortgage loan usually ranges from 5 to 30 years. The lender retains an interest in the property until the loan has been paid in full.

US commercial mortgage lenders use guidelines similar to those used for residential loans. It is important for borrowers to engage the services of a broker. A broker knows what each lender looks for in an application and sends the application only to those lenders who are most likely to approve the loan. The applicant pays the broker’s fee and often receives approval from multiple lenders, which leaves them in a position to bargain for better terms.

There are two ways to specify how the interest rate will vary over the life of the loan. A fixed rate commercial mortgage offers a flat rate of interest for the period of the loan. The alternative is a variable interest rate, which may follow after a initial period where the rate is fixed. The lender will state what their policy is for interest rate adjustments and what these will be based on. A pre-determined premium repayment amount that remains the same for the life of the loan will also be added to each regular payment.

A fixed rate loan is a good choice when interest rates in the market show an upward trend. If interest rates point towards a downtrend, a variable rate would be a better option.

The interest on a commercial mortgage is generally tax deductible and all net proceeds from the loan are considered as non-taxable income. A borrower must make sure that funds are used exclusively for the business. Commercial mortgage loans have emerged as a good source of funding for businesses seeking an investment in real estate for business purposes.