20yr vs 15yr commercial financing

2 Replies

Hey BP,

I just got a 2 unit property under contract which I am purchasing for $39k cash under my LLC. My current estimates on rehab are $40k. My plan is to get a loan from my local bank for $80k to repay my investors and fund the rehab. This property will be a long term indefinite hold.

I just got off the phone with my banker and he gave me an option for what terms I would like for this property which is something new this bank is offering. The first is the normal 5/20 at 4.25%. Which is the loan amortized over 20 years, adjusting interest rate every 5 years (typical commercial financing.) But then he told me about a new option of 10/15 at 4.75%. Which is the loan amortized over 15 years but it only adjusts interest rate once at 10 years. 

I will still cashflow with both terms, but I'm struggling to decide which option would be the best long term. I like the idea of locking in my interest rate for 10 years, but I also like the lower payment of the 20 year. I know the saying goes "you can always pay more, but you can never pay less". Should that apply here?

Thanks for your input!

@Andrew Feil Is there a maximum the loan can adjust? Even with the adjustment, I bet with the limit of the adjustment that your payment wouldnt go up all that much when the rate does reset, since the loan amount is so low.  So if that is the case, I always amortize as long as I can. Situations change, and having the flexibility of the lower payment could come in handy at some point.

@Russell Brazil I'm not sure if there is a maximum, but I know there is a minimum of 1% increase. But my banker always tells me to call him when the adjustment is coming up to see if there is anything he can do. My first thought is always to have the option to make the lower payment as well. And you are right, the adjustment on this size loan isn't going to be a killer. Thanks for the advice!