Home >
Humanities And Science >
Conservative
Commercial Loan Rates
by Thomas Morva
Commercial loan rates depend on several factors. Commercial banks base their rates on the prevailing bank rate, or discount rate, which is the rate of interest a central bank charges for loans and advances given to the banks themselves. Mortgage rates rise and fall along with Wall Street securities. Keeping an eye on mortgage market trends gives the borrower a good chance of procuring the best available interest rate possible.
The APR, or annual percentage rate, is one factor used to compare loans offered by different lenders. The Federal Truth in Lending law makes it mandatory for all mortgage companies to disclose the APR when they advertise rates. It represents the true cost of the loan to the borrower, in the form of a yearly rate. This prevents lenders from hiding fees and up-front costs. A lock in rate, also known as a rate lock or rate commitment, is a lender's promise to hold a certain interest rate offer for a specified period of time, while a loan application is processed.
Lending rates are also derived from the results of three ratios. The loan-to-value ratio (LTVR) is the total loan balance divided by the fair market value. The other ratio is the debt ratio. This compares the amount of bills that the borrower pays each month, with the amount of monthly income the borrower earns. All monthly outgoings are divided by the monthly income. Most lenders do not approve loans with a debt ratio of more than 40%.
The third ratio is the debt service coverage ratio (DSCR). This is used only for loans involving very large sums on income producing properties. The net operating income, which is the income from a rental property after deductions of all taxes, is divided by the mortgage payment for the property.
A good understanding of these factors before applying for a loan is vital in order to extract the best terms from the loan industry. This in turn helps minimize the overall cost on a new project or reinvestment in the business.
More articles by Thomas Morva:
