Advantages of a Commercial Second Mortgage or Home Equity Loan
The commercial second mortgage is an important commercial real estate instrument. Second loans are often used at the same time as a new first loan. Typically, the commercial mortgage will be limited to one to five years with interest-only payments. While commercial mortgages can be critical in some financing scenarios, consideration must be given to whether or not you have the ability to guarantee service on both loans.
There are some clear advantages to this type of creative financing. The most common usage is that a mortgage lowers the LTV (loan-to-value) of the mortgage to allow you to more easily qualify for the mortgage. An example would be where the primary lender (first mortgage) will lend only 70% LTV and you have only 20% (or less) to put down.
A commercial real estate loan can be used to make up the difference. Keep in mind that the home loan rate on a second home loan will be higher than on a first home loan.
Other uses of a commercial mortgage are to finance business development and construction, the exploitation of working capital, to consolidate debts, back taxes or for restorations.
There are a variety of options available to you such as: interest only payments, annual payments, closing fees, etc. that will help you reduce your immediate payments and defer the costs of the commercial mortgage.
The idea is to allow time for the property to appreciate and allow this fact to refinance and consolidate first and mortgages at a later date with a lower LTV than then. A primary reason to secure a home loan is to obtain a line of credit. A credit limit is using the available capital so that you can borrow any time you want.
When you get a line of credit with a home loan, what you are really doing is taking out a new “home loan” on your home equity. For example, instead of cash, take out this cash on a new mortgage for, say, $500,000; create a “credit limit stand-by loan.” Naturally, this credit limit is accessible any time you need it, paying interest only on the funds you use, and the credit limit dictates how much you can use.
If you withdraw the entire $500,000, you pay interest on the $500,000 until you pay it off in full. But if you only need part of it, you only pay interest on what you use.
If you obtain a line of credit by securing a business mortgage, it can act as a safety net for you in case of financial emergencies. Also, when you get a line of credit with a business mortgage based on your equity, your home loan rate may be less expensive than if you get a regular line of credit from a bank.