So, you’ve decided you want to purchase a building for your business. You’ve hired a real estate advisor to help you find the best property. With your advisor’s help, you have selected from three choices and you have negotiated a great deal on price and terms. You have just signed the contract, and now you realize you have another big decision: how much do you borrow, and how much will your payments be?
No worries! To assist you, here are a few pointers on financing, and a mortgage calculator to aide in calculating your payments and also provide a few pointers on financing to help you along the way.
The mortgage calculator below allows you to plug in the interest rate, the present value (or principal amount), and the amortization period (or length of time to pay off your loan) in order to solve for your monthly payments. Some lenders talk about Loan-to-Value (or LTV), which simply means how much you borrow as a percent of the purchase price. For example, if you borrow $400,000 on a $500,000 property, your LTV is 80%. The more you borrow, the more risk you take on, and you should carefully consider your down payment and your monthly payments, being sure not to over-obligate yourself.
Some banks talk about the “term” of your loan. Term should not be confused with amortization period, though they are sometimes the same. The term is how long the loan will last before the bank re-sets the interest rate or requires the outstanding balance to be paid. The amortization period is how long it would take to pay your loan balance down to zero (with principal and interest payments) if there were no term or call of the note. Often times, banks will commit to a term much shorter than the amortization period. For example, they will quote a three-, five- or seven-year term on a 15-, 20- or 25-year amortization (or “am”). In these examples, there will be a balloon payment due at the end of the term. This simply means that the borrower will owe the remaining principal balance when the term expires. At that time, the bank will have the right to reset the interest rate or require the borrower to pay off the balance.
Finally, don’t forget to consider other costs associated with the purchase, including the appraisal fee, environmental assessment (or phase one), survey, loan points (or loan origination fees), due diligence inspection costs, title searches, attorney/closing fees, insurance premiums and other professional fees. All of these add to the cost of real estate acquisition and may affect how much you borrow or have to bring to the closing table.
Contact one of the real estate professionals at New Branch to help you work through your mortgage calculations and consider all the factors when financing a property. We’re glad to help.