Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Mortgages are also known as “liens against property” or “claims on property.”
Breaking down Mortgage: Residential and Commercial Mortgages
Residential mortgage implies a loan that one or more persons receive in order to buy a house or other residential property in which they will live. The loan is secured by a lien on the property; the borrowers repay it over a specified period of time. Interest on residential mortgage is tax deductible only if the mortgage is used for investment purpose (Stocks, rental properties etc.).
Commercial mortgage is a mortgage loan secured by commercial property, such as an office building, shopping center etc. The proceeds from a commercial mortgage are typically used to acquire, refinance, or redevelop commercial property. Commercial mortgages are structured to meet the needs of the borrower and the lender.
The thin line between Residential and Commercial Mortgage
Residential and commercial loans are similar in many ways. However, there are some major differences in the uses for commercial loans, and the way that you qualify for them as opposed to residential loans.
Commercial loans are riskier than residential loans. If someone who owns a residence and commercial property has financial difficulties, they will make sure their home mortgage is paid first and often become delinquent on their commercial property mortgage.
The major difference between the residential mortgage and commercial mortgage is the required minimum down payment that the borrower needs to make. Since there is a higher risk for a commercial mortgage, the lender usually wants to see some equity to be paid down by the borrower.
Commercial mortgages in general have higher interest rates and shorter terms than residential mortgages. This is due to the fact that there is a significantly smaller secondary market for commercial loans.