Business Equity Line vs. Fixed Rate Business Second Lien Position Loan

Many homeowners in the commercial real estate industry are unaware that a second lien position loan exists, and especially so in this difficult market. But yes, for the correct scenario, borrowers can still secure these second lien loans. These programs are oriented to smaller projects although with real estate values ​​less than $3,000,000. Loan amounts on commercial line or commercial second mortgages are capped at $500,000.

Both programs can be used by investors or business owners, although loan applications are easier for business owners to finance (because there are no property-specific debt coverage ratios to contend with).

As for which loan program is a better option, we generally recommend the fixed rate program. First of all, the rate is fixed between 5, 10 or even 15 years. This security of knowing that the interest rate will not move is valuable in this uncertain market. With inflation looming, it seems certain that the Federal Reserve will soon start raising rates again, putting many borrowers on floating loan programs in difficult positions.

Also, the commercial second mortgage rate is often at par with or just slightly higher than the line, securely fixed. For example, as of this writing on 7/08, the rate on the line for a loan amount of $500,000 is around Prime plus 1.5% or 6.5%. While the 5-year fixed 30-year amortization loan rate is 6.9%.

Also, underwriting is usually a bit easier with the business second mortgage than it is with the business line of credit.

The main benefit of the business capital line of credit is having capital available and ready. Like a home equity line of credit, the borrower does not pay interest on the line unless the borrower withdraws and uses the money. Borrowers who want the line often use it to recapitalize a business, rehab or renovate another property, or use the money from the line as a coup on another property purchase.