123ArticleOnline Logo
Welcome to 123ArticleOnline.com!
ALL >> Business >> View Article

Commercial Mortgage Interest Rates

Profile Picture
By Author: John Tang
Total Articles: 512
Comment this article
Facebook ShareTwitter ShareGoogle+ ShareTwitter Share

Commercial mortgage interest rates are a combination of the margin that the bank changes and the index that they use. For example if a bank quoted Prime (the index) plus 2% (the margin) you're actual or "effective interest rate" would be 7% (Prime is currently at 5%).

Lenders use a wide range of indexes. On owner occupant transactions Prime is still very popular and is used much of the time. This is especially true with floating rate loans. The SBA 7a program still uses Prime for example. Commercial investment deals use a broad range of indexes. The treasuries are popular but each individual lender has their preferences. The index used is probably less important for the borrower than the margin that the funding bank uses.

The margin is basically how the bank makes its money and its spread. The bank typically is borrowing the money that they lend and therefore has a cost of capital. The spread is the difference between what they pay for their sources of capital and what they make off of lending money.

Creating or pricing out the margin is no easy task. It's a complicated process as the bank has to be competitive ...
... in order to win deals yet not quote margins to "skinny" as to not make enough money. Banks have to essentially predict the future and take into account a percentage of default, cover future costs, and of course try to make a profit.

The combination of the margin and index is commonly referred to as the Effective Rate. It's what the borrower uses to figure out their payments. For instance, if a lender quoted you 5 Year SWAP (Currently at 3.9%)plus 2.5% your Effective Rate would be 6.4%.

One of the odd things that we have seen in the last year is the fattening of margins which comes as a surprise to many borrowers. Many assume when they hear that "interest rates" have been lowered by the Feds that it means that there potential interest rates on loans have been reduced. What it really means is that the cost of capital for the banks has been lowered but that doesn't mean that the banks have kept their margin the same as a year ago. For example, margins in January 2007, where commonly 2%, now it's not uncommon to see margins at around 4%. So the borrower's effective rate is the same or in many cases actually higher than it would have been before the Fed lowered rates.

Total Views: 393Word Count: 410See All articles From Author

Add Comment

Business Articles

1. Finding A Trusted Sustainability Consultant In Abu Dhabi
Author: Agile Advisors

2. Iso Certification In Dubai – Advantages For Business
Author: Agile Advisors

3. Best Forex Brokers List | Best Broker For Forex Trading 2024
Author: Top Forex Brokers Review

4. Celebrate Achievements With Customized, High-quality Awards From Trophy Deals
Author: Trophy Deals

5. Is 100% Company Ownership Possible For Expats In Saudi Arabia?
Author: jodonjo

6. We Are Hiring: Senior Executive - Indirect Taxation In Gurgaon!
Author: tanvir Khan

7. Ceratec Tower 1o8: The Eventual Fate Of Business Greatness In Balewadi, Pune
Author: Tarun

8. Enrofloxacin Manufacturer: Swisschemie
Author: Swisschemie

9. Ultimate Guide To Hotels In Mussoorie: Discover The Best Places To Stay, Including Hr Hotels And Resorts
Author: Hr Hotels and Resort

10. How Quickly Do Fast Cash Loans Online Pay Out Cash On The Same Day?
Author: Lucy Lloyd

11. Leading Digital Marketing Agency In Hyderabad And Unlock Your Brand’s Potential With Sanbrains Agency
Author: Sanbrains Seo

12. Celebrate Success With Customized Awards From Trophy Deals
Author: Trophy Deals

13. Title: Choosing The Right Humidity Stability Chamber Supplier For Your Manufacturing Needs
Author: bio gene

14. Complete Guide To Studying Mbbs In Poland
Author: Mbbs Blog

15. What Is The Process For Locating The Best Lender For Short Term Loans Online?
Author: Robert Miller

Login To Account
Login Email:
Password:
Forgot Password?
New User?
Sign Up Newsletter
Email Address: