The Benefits of Fixed-Rate Loans
Fixed-rate loans have the power to shield investors from rising interest rates. Learn how they accomplish this and other key benefits that fixed rate financing offers to borrowers.
Investing in commercial real estate can be a complex and challenging process, from choosing a market and property to finding suitable funding and closing the deal. And often, obtaining the right loan determines the success of your investment; therefore, it's essential to thoroughly analyze your loan options before jumping into one.
Fixed-rate and adjustable-rate loans are the two main options investors can choose. While both types of loans can be highly beneficial to investors, depending on their investment strategies, fixed-rate loans make more sense amid the current economic conditions. In this article, we’ll explain why.
What Are Fixed-Rate Loans?
The main aspect of a fixed-rate loan is that interest rates remain unchanged during the entire loan term. This indicates that the loan will stay immune to fluctuations in the market, and borrowers might expect the same monthly payments during the life of the mortgage. The primary benefit of a fixed-rate loan is that borrowers can accurately predict monthly costs and future expenses, allowing them to budget accordingly.
Fixed-Rate Loans vs. Adjustable-Rate Loans
In a healthy economic environment — where interest rates are expected to decrease — variable-rate loans usually cost less to borrowers over the long term, however, this is not the case now.
In an attempt to curb inflation, the Federal Reserve has been steadily and rapidly increasing the federal funds rate, which has had significant impacts on those with adjustable-rate loans — and on anyone looking to refinance. If you have a variable rate on your loan, rates are not expected to go down anytime soon, so a refinance into a fixed-rate loan is probably your best bet now, especially with future rate hikes on the horizon.
Although there are interest rate caps to protect borrowers with variable-rate mortgages, the caps are often set at such high levels that they essentially provide no benefits in a highly volatile market. Additionally, due to the high demand, the cost of buying caps also increases during uncertain times.
Therefore, it is without a doubt that fixed-rate loans are the best financing option when interest rates are predicted to rise significantly. The borrower is not exposed to sudden changes in the economy, and the monthly mortgage payments will stay the same. Nonetheless, it should be noted that qualifying for fixed-rate loans during a high-interest-rate environment is more difficult, simply because the cost of borrowing money is higher.
Current Interest Rates
The table below contains several current interest rate indexes. While all are more or less tied to the federal funds rate, be sure you understand what index your current or future loan is tied to.
Related Questions
What are the advantages of a fixed-rate loan for commercial real estate?
The main advantage of a fixed-rate loan for commercial real estate is that the interest rate remains unchanged during the entire loan term. This means that the loan will not be affected by fluctuations in the market, and borrowers can expect the same monthly payments throughout the life of the mortgage. This allows borrowers to accurately predict their monthly costs and future expenses, making it easier to budget accordingly.
Additionally, fixed-rate loans are the best financing option when interest rates are predicted to rise significantly. The borrower is not exposed to sudden changes in the economy, and the monthly mortgage payments will stay the same. However, it should be noted that qualifying for fixed-rate loans during a high-interest-rate environment is more difficult, simply because the cost of borrowing money is higher.
What are the risks associated with fixed-rate loans?
Fixed-rate loans are generally considered to be a safer option than adjustable-rate loans, as they provide borrowers with the security of knowing that their monthly payments will remain the same throughout the life of the loan. However, there are some risks associated with fixed-rate loans. For example, if interest rates drop significantly, borrowers may be stuck with a higher interest rate than they could have gotten with an adjustable-rate loan. Additionally, if interest rates rise, borrowers may be unable to refinance their loan due to the higher cost of borrowing money. Finally, if the borrower is unable to make their monthly payments, they may be subject to foreclosure.
What are the differences between fixed-rate and adjustable-rate loans?
Fixed-rate loans are loans with an interest rate that remains the same for the life of the loan. This means that the monthly payments will remain the same, regardless of changes in the market. On the other hand, adjustable-rate loans have an interest rate that can change over time, depending on the market. This means that the monthly payments can increase or decrease depending on the market conditions.
According to The Benefits of Fixed-Rate Loans, in a healthy economic environment, variable-rate loans usually cost less to borrowers over the long term. However, due to the Federal Reserve increasing the federal funds rate, variable-rate loans are not expected to go down anytime soon. Additionally, due to the high demand, the cost of buying caps also increases during uncertain times. Therefore, it is without a doubt that fixed-rate loans are the best financing option when interest rates are predicted to rise significantly.
According to 8 Reasons Why You Should Consider an Agency Loan, agency loans are available as both fixed-rate and adjustable-rate loans. This means you can choose the type of loan that best suits your needs. If you opt for a fixed-rate agency loan, the interest rate will remain the same for the life of the mortgage — even if rates begin to rise astronomically. This provides peace of mind and stability, as you know your monthly payments will remain the same through the loan's term.
What are the benefits of a fixed-rate loan for small businesses?
The main benefit of a fixed-rate loan for small businesses is that it allows them to accurately predict their monthly costs and future expenses, allowing them to budget accordingly. Fixed-rate loans are also beneficial in a high-interest-rate environment, as they provide protection from sudden changes in the economy and keep monthly mortgage payments the same. However, it should be noted that qualifying for fixed-rate loans during a high-interest-rate environment is more difficult, simply because the cost of borrowing money is higher.
For more information on fixed-rate loans, please see The Benefits of Fixed-Rate Loans.
What are the drawbacks of a fixed-rate loan for commercial real estate?
The main drawback of a fixed-rate loan for commercial real estate is that the interest rate remains unchanged during the entire loan term. This means that the loan will not benefit from any fluctuations in the market, and borrowers will have to pay the same monthly payments throughout the life of the mortgage. Additionally, since the interest rate is fixed, borrowers may end up paying more than they would have if they had taken out an adjustable-rate loan.
For more information on interest-only loans in commercial real estate, please see this article.
How can I find the best fixed-rate loan for my business?
The best way to find the best fixed-rate loan for your business is to shop around. You can do this yourself by researching different lenders and comparing their loan terms, or you can use a service like Commercial Real Estate Loans to do the work for you. We have relationships with a vast network of lenders across the country, and we leverage that to provide the very best loan terms available. So, take a minute, and get a free quote from us today. Learn more about commercial mortgage rates here.