Loans with no interest rate cap? Too much of a risk?

Question

It's our first time applying for a commercial loan. The bank is offering 6.5% 15 year loan, where the first five years are fixed, but after that it becomes a variable rate. The caveat is that there is no cap on the rate. It could change to any percentage at any point during the lifetime of the loan. If the rate does increase to a ridiculous amount, the out would be to re-finance. But paying closing costs twice within 5-6 years would completely diminish any profit made by the investment. Does anyone have experience with no-cap commercial loans? What advice could you offer?

Andrew Postell · Answer

@Alejandra Roca ok, thanks for that description.  Would certainly recommend looking around.  Maybe even try posting in the state forum of where the property is located here on Bigger Pockets.  There might be some good local people who can recommend some other solutions as well.  Good luck!

Erik W. · Answer

6.5% is high.  I got 5.25% on a recent refinance, fixed for 5 years, no balloon, 15 year term.  Capped at 11%.  Try shopping around.  If you're going to pay it off in < 5 years, the rate and fix doesn't matter.  Rates are still very low and will eventually go up....eventually.  ;-)

Alejandra Roca · Answer

@Andrew Postell Hello Andrew, it’s two single family homes and a duplex. Not absolutely necessary to do a commercial loan, but we’re looking to build a relationship with that bank, as we’re planning on purchasing a 5+ unit this year as well. Thanks!

Andrew Postell · Answer

@Alejandra Roca what kind of property is this for exactly?  If it's a residential home...there will certainly be better terms available.  If it's a commercial property, like a warehouse or something....that will change the response here.  Let us know what you are examining.  Thanks!

Michael Albaum · Answer

Ask the lender to put in a cap, or go elsewhere. I've gotten numerous commercial loans and they have ALL had upper caps. Make the lender fight for your business by shopping elsewhere. Best of luck!