Understanding Permanent Fixed-Rate and Floating-Rate Loans

Understanding Permanent Fixed-Rate and Floating-Rate Loans

When it comes to commercial mortgages, borrowers often face a choice between permanent fixed-rate and floating-rate loans. Understanding the differences between these two options can help you make a more informed decision.

What is a Fixed-Rate Loan?

A fixed-rate loan has an interest rate that remains the same for the entire term of the loan. This means your monthly payments will be consistent, making it easier to budget. Fixed-rate loans are ideal for those who prefer stability and predictability in their financial planning.

your rate will stay the same. However, if market rates decrease, you will not benefit from the lower rates.

What is a Floating-Rate Loan?

A floating-rate loan, also known as a variable-rate loan, has an interest rate that can change over time. The rate is typically tied to a benchmark index, such as the LIBOR or the prime rate. As these indices fluctuate, so does your interest rate.

Floating-rate loans can be advantageous if you expect interest rates to decrease in the future. These loans often start with a lower rate compared to fixed-rate loans, but they come with the risk of increasing rates, which can lead to higher monthly payments.

financial planning. You also have the peace of mind that comes with knowing your interest rate will not increase.

• Pros: Payment stability, protection from rising rates
• Cons: Higher initial rates, no benefit from decreasing rates

Pros and Cons of Floating-Rate Loans

Floating-rate loans can offer lower initial rates, which might be appealing if you expect to sell or refinance before rates rise. However, the risk of increasing rates can make these loans less predictable and harder to budget for.

• Pros: Lower initial rates, potential benefit from decreasing rates
• Cons: Rate volatility, potential for higher payments

fixed-rate loan may be the better option. On the other hand, if you are comfortable with some level of risk and are looking for potentially lower initial rates, a floating-rate loan might be more suitable.

Consider your long-term financial goals and consult with a mortgage broker to determine which type of loan best meets your needs. Understanding the nuances of each option will help you make a more informed decision and secure the best financing for your commercial property.