What Is a Permanent Loan?

Any loan having a period longer than usual is considered a permanent loan, even though it is not genuinely permanent. These loans are typically obtained through a bank, credit union, or life insurance provider for commercial real estate, and they have a 25-year amortization period.

However, your lender might accelerate loan amortization if the property is older than 30 years and exhibiting severe symptoms of wear and tear. In actuality, “prudent” lenders generally believe that 30 years is an acceptable maximum life of a loan for real estate, according to the Office of the Comptroller of the Currency.

The benefits and cons of a permanent loan are discussed below to help you decide if it’s the best option for you.

Definition and Examples of a Permanent Loan

A permanent loan is a loan with an extremely long term that is frequently obtained on commercial real estate to pay for financing charges, construction loans, interim loans, and development fees. Banks, credit unions, and life insurance companies frequently make these loans, which typically have lower interest rates.

The lender you use will determine the minimum and maximum loan amounts. Let’s imagine, for instance, that you wish to obtain the first loan for a piece of commercial real estate but are unsure of where to start. Banks typically provide more lenient terms for commercial loans, and they can offer long-term loans ranging from $100,000 to $100 million (as can private equity firms). In contrast, credit unions can only provide loans up to a maximum of $1 million and $2 million, while life insurance companies typically provide fixed-rate loans for a minimum amount of $5 million.

How Does a Permanent Loan Work?

Long-term loans known as permanent loans are frequently utilized to buy commercial real estate. After obtaining a construction loan, these mortgage loans are typically given to developers for the purpose of developing and selling (more on this below). But with a construction-to-permanent loan scheme, borrowers who wish to renovate an existing house or build a new one have their own long-term choice.

With the help of just one loan, our program walks you through every step of funding and finishing a building project. It gives you the freedom to renovate your current house or create a new one while continuing to live in the one you already have.

You’ll negotiate with your lender to convert it to a permanent loan after the construction is finished. It initially begins off as a construction loan. By doing so, you can streamline the financing process and avoid having to acquire different lots. Additionally, you will only need to make one closing cost payment.

Types of Commercial Real Estate Loans

Permanent Loan

Long-term financing options include permanent loans, which normally amortize after 25 years. They are typically provided by banks, credit unions, and life insurance firms and typically have modest interest rates.

Construction Loan

A construction loan is a brief loan used to finance the building of new homes or businesses, as well as their renovation. After construction is complete, the owner of the property must apply for a mortgage to cover the cost of the finished building.

Bridge Loan

Short-term financing such as bridge loans is typically used to pay off your existing mortgage. This releases equity that can be used to buy a different house or piece of land. The loan will be paid off once the house or other property has been sold for a profit.

Permanent Financing vs. Short-Term Financing

The fundamental distinctions between long-term and short-term funding are shown in the table below.

Permanent financing Short-term financing
Come with loans terms of 12 months or longer Must be repaid within a year
Borrowers can make monthly payments Paid off in a single lump-sum amount
Typically used to purchase fixed assets Used to fund daily operations and short-term projects

Long-term financing comes in the form of permanent financing. The minimum loan period is one year, while most loans have far longer terms.

You have a number of alternatives for your repayment plan with these flexible loans, including monthly, yearly, or small lump-sum payments.

In contrast, short-term borrowing typically has a one-year repayment period and is settled in one big sum. These loans are typically obtained to finance transient initiatives like remodeling.

Pros and Cons of a Permanent Loan

Pros Explained 

  • Comes with 100% financing: The full construction project can be financed, and the money is distributed once the job is finished.
  • Select your own builder: With this loan, you can select the builder of your choice.
  • Build a new home or renovate your current one: Both options are available.
  • One-time closing: You can just close once with this practical financing scheme, saving you money on closing fees.

Cons Explained

  • Complex loan product: This loan product has a lot of moving elements and is quite sophisticated.
  • Delays could occur: The potential for delays because of problems with the materials or quality concerns is one of the most difficult parts of these loans.

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