Financing mixed-use 4-unit -- mortgage opinions wanted

[Timothy Smith]

I'd love some feedback as I shop mortgages for a mixed-use building I just put under contract. The plan is to convert the commercial space (currently 1 of the 4 units) to a residential unit, which I've already cleared with the city permit/inspections office and have spoken with an architect regarding the process. There are a few local lenders offering construction/rehab loan products, each with slightly different requirements and perks. I've worked with one of them four times already and have an excellent reputation with them, but I'm not sure they will work for this particular project. I'm also close to my borrowing limit with them. Here is the breakdown:

Purchase price $110K, rehab estimate $140K. Projected ARV $275K+

Lender #1 (with whom I already have a relationship)

80% LTV (as complete) lender for 1-4 family residence, will finance 80% of purchase and 100% of the rehab

75% LTV lender for mixed-use, should I decide to not convert the commercial unit to residential

5 year note/25 year amort

rate is locked at commitment

no prepayment penalty

7% interest only during construction period (up to 12 months), 5-5.5% locked rate following permanent mortgage conversion

one closing

no bids, estimates, or invoices required from contractors after we submit the initial Work Scope. Construction draws are paid directly to me, and I pay contractors from that. If I'm able to cut costs during the project, it's more cash recapture. If I go over budget, it's out of my pocket. 

Lender #2

80% LTC lender regardless of property type (this would cost me roughly $30K more and eliminate possibly of BRRRR)

5 year rate reset/25 year amort

current rate roughly 4.2%, but doesn't lock until just before closing. Rate for permanent mortgage locks after construction period is complete (up to 1 year)

5-6% interest only during construction period

cannot remember if there is prepayment penalty

one closing

requires documentation during construction process. Invoices, estimates, and contracts monitored by 3rd party

My initial take

Even though the rate of lender #1 is higher, the difference between LTV and LTC gives more opportunity for cash recapture (BRRRR). Plus, the paperwork required during construction is significantly simpler. I would have to commit to converting the commercial space to residential during the loan application process, but I should know that anyway!

Lender #2 has better rates and a 25 year commitment, but won't offer the opportunity for cash recapture. Interest saved on the same mortgage amount is $36K ($120/mo) over the life of the loan. 

Hmmm.....just writing this all out pretty much gives me my answer! Opinions or questions I should ask greatly appreciated -- thanks!