The difference between a commercial and residential loan can be thousands of dollars in interest and fees. A mixed-use property, one that has both a residential and commercial purpose, can go either way. The deciding factor is the amount of space allotted to residence and the space designated for business.
Commercial or Residential
Many lenders will make the decision for you when it comes to the type of loan on your mixed-use property. If you have a 1,000-square-foot building with a store comprising 750 square feet and your home taking up the other 250, banks will consider it a commercial property. And if you lease out the residential portion of a mixed-use property as opposed to occupying it yourself, the whole property will be considered commercial. Talk to different lenders to see what they can do for you.
Residential rates are very black and white, whereas commercial rates can vary greatly even among different loans at the same bank. Most banks have fixed residential rates for loan terms up to 30 years. Commercial real estate rates are typically adjustable. A common term would involve a fixed rate, say for example 5 percent, for the first five years. After that five-year period, the rate would adjust to an index, typically the local Federal Home Loan Bank, United States Treasury or Wall Street Journal Prime rate, plus a margin. If your rate is prime -- which is currently 3.25 percent -- plus a margin of 2.50 percent, your rate at the adjustment period will be 5.75 percent. The rate will continue to adjust at five-year intervals, up to a maximum of 20 or 25 years.
Fees are much greater on a commercial loan. A residential mortgage will carry a small application fee of anywhere from $250 to $500. A commercial loan is based on a percentage of the loan amount. For example, if you get charged 0.5 percent on a $500,000 loan, the application fee will be $2,500. Additionally, commercial loan documents are more complex and often require the use of an attorney. The fee for attorney-prepared documents can run into the thousands as opposed to a couple hundred dollars for stock bank documents. Finally, a commercial appraisal can cost significantly more than its residential counterpart, again talking thousands of dollars as opposed to hundreds.
Again, if your property is booked as a commercial loan, the closing will be more complex. If you get a residential loan, you'll sign a note, mortgage, escrow agreement and a few more standard documents. With a commercial loan, you'll sign the note and mortgage in addition to several others. An assignment of leases and rents gives the bank the right to collect rent from your tenants if it seizes the property. If the property is owned by a business, you may have to sign a guarantee, making you personally liable for the loan if the business fails. You will also sign an environmental indemnification guaranteeing that no environmental hazards affect the property.