A commercial second mortgage is an important commercial real estate tool. Commercial second mortgages are often used in conjunction with a new first commercial mortgage loan. Typically, the commercial second mortgage will have a term of one to five years with interest only payments. While commercial second mortgages can be critical in some financing scenarios, consideration must be given as to whether or not you have the ability to service both loans.
There are some clear advantages to this type of creative financing. The most frequent use is that a commercial second mortgage reduces the LTV (loan to value) of the first mortgage in order to allow you to more easily qualify for the first mortgage. An example would be where the primary lender (first mortgage holder) will only lend 70% LTV and you only have a 20% (or less) down payment. A commercial second mortgage can be used to make up the difference.
Other uses for a commercial second mortgage are to finance business expansion and construction, working capital, to consolidate debts, pay tax arrears (lets face it, this does happen), or for renovations.
There are a variety of options available to you such as: interest only payments, annual payments, exit fees, etc. that will help keep your immediate payments down and defer the costs of the commercial second mortgage. The idea is to give the property time to appreciate and thereby allow you to refinance and consolidate both the first and second mortgages at a later date at a then lower LTV.
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