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Many commercial mortgage loan rates are determined as spreads over various indices, even when the lender quotes a rate without the spread. Typically spreads on commercial mortgage loan rates increase when the Fed increases the discount rate. However, numerous other factors affect commercial mortgage spreads, which in turn determines many commercial mortgage interest rates.
Many fixed-rate loan products are set at spreads over SOFR, which is a major capital markets floating rate index. Floating rates are swapped with fixed rates through the swap market. As a result, swap spreads have become a good indicator of overall credit market risk.
Developing an understanding of the interplay between market risk and the risk tolerance and pricing characteristics of different types of lenders helps Financial Compound to understand the dynamics that make up commercial mortgage interest rates. A good starting point for this understanding is to study the interplay between commercial mortgage indices and the spreads over those indices that determine where commercial mortgage loan rates.
A skilled commercial mortgage broker, Financial Compound, can help borrowers understand commercial mortgage loan rates and determine which type of financing program makes the most sense for the property and the long-term strategy of the borrower. Amortization and property cashflow should be projected throughout the term of the loan to avoid unanticipated phantom income as well as to understand balloon and refinance risk.
Many long terms loans offer low fixed-rate starter rates and oftentimes with no amortization. Typically these loans hyper-amortize after a ‘teaser’ period or convert to floating commercial mortgage loan rates. Borrowers are best advised to understand the impact on their cash flow related to the duration of any fixed-rate started mortgage interest rate conversions.
Despite the economic recessions, commercial mortgage rates remain historically low for most property types. While the lender parameters are not as robust as they were before the Great Recession, the availability of historically low long-term and short-term commercial mortgage rates is helping to save commercial real estate values from additional declines.
With commercial mortgage rates so low, it is possible, even in today’s market, to acquire commercial real estate assets with positive leverage while locking in the commercial mortgage for periods of up to 10 years.