Many businesses get commercial real estate loans and after some years they plan to get rid of loans and decided to make prepayment – payments before loan maturity. Well, one thing many don’t know is that there are severe penalties for this kind of action.
Trust me, I don’t want to scare you at all.
I want to show you a clear picture of commercial real estate loans by telling you all about Prepayment types. So, before you walk on that road, you know what you are putting yourself into.
So, are you ready to get a reality check?
I’m sure you will.
Let’s get to it right away.
Prepayment of Commercial Real Estate Loans – What you need to know Must?
Lenders put restrictions on the prepayment of this kind of loan. Why? Because they earn from interest. And if you settle quickly, their yield drops and their business shatters. And no lender on earth wants it.
You can know all about those penalties and early payment fees/charges by checking the prepayment clause under your terms and conditions page.
Here are 4 kinds of EXIT Penalities, you might encounter during the Prepayment of Commercial Real Estate Loan.
- Prepayment Penalty – It’s the pretty straightforward fee you will have to pay in case you are in the mood to get rid of the loan amount in full. The lender will mention a rate that you need to pay in the form of a penalty and it’s calculated usually on the outstanding balance of the loan.
- Interest Guarantee – Another kind of Exit Penalty is this one where the lender tries to secure him by ensuring that you would pay a certain tax rate such as 10 to 12 percent on the loan amount, in case you decide to wrap up your commercial real estate loan early. Keep in mind that you will also pay a minimal 3-4 percent exit fee.
- Prepayment Lockout – That one I called a sweet way of avoiding loan risk by the lender. He locks your loan prepayment. It means you can’t repay a loan for five to seven years. There is no repayment option for the first seven years, after that, you can negotiate or set some terms, though.
- 4. Defeasance- Don’t have cash? Still, want to kick a loan out of your life? Well, there is an option that seems like a last resort for commercial real estate loan borrowers. It is known as Defeasance. What happens? Well, you pay in the form of collateral like other property, securities, stocks, etc. You use other forms of cash to pay the loan. But again, you will have to deal with high prepayment penalties, so give it a try only when other options are impossible. Else your loan cost will be exponential, which is never a smart financial move. Don’t you think?