Uses for a Commercial Second Mortgage

Commercial second mortgages can be used in two ways: in conjunction with a new first mortgage to fully finance a commercial property or to exchange equity in a commercial property for liquidity. In either scenario, commercial mortgages are much more flexible than residential property mortgages because they are generally not amortized with a normal schedule. Most commercial mortgages require only interest payments and a balloon payment after a certain amount of time, Typically, 10 years of interest payments under a 30-year amortization schedule and then a balloon payment of the remaining balance for a first mortgage. A second commercial mortgage will be subordinated to the first mortgage, so like any second mortgage it will have a higher interest rate than the first mortgage.

Using a First and Second Mortgage Simultaneously

A commercial second mortgage may be taken out at the same time as the first mortgage. It can be used to either purchase the property more easily or to fund future projects. For example, if the first mortgage lender is willing to finance 70 percent of the value of the property and the borrower can afford a 20 percent down payment, he may look to another lender for a second mortgage of 10 percent of the property value so that it can be purchased. The second mortgage may also be used for anticipated future projects, such as new development, repairs, maintenance and upgrades to existing facilities.

Obtaining a Second Mortgage for Liquidity

If a borrower has a significant amount of equity in the commercial property, a commercial second mortgage can be used similarly to a standard second mortgage as a means of obtaining liquid capital. Most times, a borrower will have equity by either by paying for it upfront or paying off most of the first mortgage. This is particularly useful when a loan is combined with other financing needs. For example, the proceeds from the second mortgage can be used as a down payment in another investment property or in place of a construction loan on an existing property. Borrowers prefer using a commercial second mortgage because the rates are fixed and financial planning is therefore more convenient, as well as less risky. Borrowers should also consider a commercial second mortgage as a replacement for a floating line of credit and use it for business expenditures like equipment purchases, or operational and structural upgrades, that would otherwise face higher interest rates in a revolving credit agreement.

A Note on Terms

Commercial second mortgages tend to be significantly smaller than first mortgages and will typically carry only a 5-year term. An exception to this general rule would be if the first mortgage is almost entirely paid off. Second mortgages are not always a replacement for refinancing, which is commonly necessary with commercial mortgages. This is especially true when the first mortgage is structured with balloon payments. Borrowers should carefully consider whether they can take on the additional burden of a second mortgage.

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