I have been practicing residential financing for over 30 years and commercial financing for over 20 years and have provided commercial financing on Multifamily (Apartments), Office, Retail, Medical (Dental and Doctor Offices) and Light Industrial properties (data storage units and auto dealerships).

During that time, I have witnessed that residential interest rates were always lower than commercial rates until the Federal Reserve started raising rates in January of 2022.  In looking at the current interest rate market, residential rates are varying between 6.5% to 7.5% depending on the loan amount, ltv, fico’s, property type and points paid, etc.  Commercial lending on the other hand has ranged recently from 5.5% to 6.5% depending on loan term, property types and points paid.

Most Important…

Commercial loans all have prepayment penalties (where residential loans do not) and they usually follow the term of the loan so they tend to not only be costly (if one breaks them) but they also tend to be very long in duration!

For Example…

  • 5 Year Fixed Loan (on a commercial loans) have a 5 year prepayment penalty that works like this with a 5-4-3-2-1 Prepay.  Year 1 of loan, the loan has a prepayment of 5% of the loan amount if the loan is paid down or paid off.  Year 2 is 4%.  Year 3 is 3%.  Year 4 is 2% and year 5 is 1%.  After the 5th year of 61 months out, the prepayment penalty drops off.
  • 7 year fixed with 7-6-5-4-3-2-1 Prepay…Year 1 of loan, the loan has a prepayment of 7% of the loan amount if the loan is paid down or paid off.  Year 2 is 6%.  Year 3 is 5% and so on like the 5 year fixed.  There’s also 10 and 15 year fixed loans.

So…Here’s the Million Dollar Question…Why is it so Important in This Market to Not Have a Prepayment Penalty on a Commercial Loan?

AnswerIf you have a prepayment penalty on your commercial loan and rates drop, then how is one able to refi without breaking the terms of the loan and paying the prepayment penalty?  There Isn’t.  All you can do is a get a loan with a shorter prepay if one exists.

“Voila”We have that option and banks like Chase, First Republic, Heritage to name of few don’t!

Last week we had a client with $2m dollar commercial loan that was comparing us to another lender and our rate was .5% higher in rate than the other lender or $650 per month more, but our prepayment on 5 year fixed was a 2-1 and theirs was a 5-4-3-2-1.  On $2 million in loan amount, year 2 (let’s say 18 months out after closing, rates drop) and the client wants to refi.  The client then pays $80k for the prepayment penalty with the other lender.  Our lender charges $20k plus the spread of the monthly payment equal to $650 or $11,700 at the 18th month or $31,700 in total.  The other lender charges the client $80k.  Hmm…$31,700 from our lender or $80,000 from the other lender with the lower rate.  Our option would save the client $48,300.  Again, which option is better?  Which lender should the client use??  Us or them???

See the logic of going with a lesser prepayment even if the rate is higher by a tad?  Having the lesser term or prepay is the logical way to go.  Unfortunately, this client was fixed on one thing…the rate where I was focused on the long term solution…Flexibility and the probability of lower rates and payments in the future, per this report from Morning Star, a publication that definitely is the closest to a crystal ball!

In Closing…

In the world of commercial lending just like residential lending there is more to just making a decision solely on the rate as illustrated above.  If you want our help and sage experience in making the best decision when it comes to choosing a loan product or making a financial decision, please contact us.

Below is a List of What we Do:

BTW...if you’d like to review my current market report, please go here.

All the Best,

Rob McCarthy

Senior Mortgage Advisor


650-465-8957 c  408-377-4123 o  408-608-1921 f

CA DRE #01165697  NMLS #121019

101 Loan – 6090 Hellyer Ave #100, San Jose, CA 95138

Note: Interest rates and loan programs quoted are subject to change without notice or until locked and approved by lender.

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