Question for mortgage lenders!

[Jennifer Wilson]

Hello!

My husband and I are looking into a purchase of a commercial property where we can assume the current loan. We were provided the current owner’s promissory note. I am reading this differently than what the seller is stating and am wondering if a lender can clarify if the interest rate will change as of April 5, 2024.

The actual verbiage of the note is as follows:

Interest will begin to accrue on March 29, 2022. The initial variable interest rate on this note will be 3.5% per annum. This interest rate may change on June 5, 2022 and daily thereafter. Each date on which the interest rate may change is called the change date . Prior to each change date, lender will calculate the new interest-rate based on prime rate as published in the Wall Street Journal in affect on the change date. The interest rate will never be greater than 3.65%

Beginning on April 5, 2024, this Note will be subject to a variable rate of interest that will be based on Prime Rate as published in the WSJ in effect on the change date. This interest rate may change on April 5, 2024…

It continues on about change dates but seems like standard verbiage. Thank you for your help!

Jen

[Robin Simon]

Quote from @Jennifer Wilson:

Hello!

My husband and I are looking into a purchase of a commercial property where we can assume the current loan. We were provided the current owner’s promissory note. I am reading this differently than what the seller is stating and am wondering if a lender can clarify if the interest rate will change as of April 5, 2024.

The actual verbiage of the note is as follows:

Interest will begin to accrue on March 29, 2022. The initial variable interest rate on this note will be 3.5% per annum. This interest rate may change on June 5, 2022 and daily thereafter. Each date on which the interest rate may change is called the change date . Prior to each change date, lender will calculate the new interest-rate based on prime rate as published in the Wall Street Journal in affect on the change date. The interest rate will never be greater than 3.65%

Beginning on April 5, 2024, this Note will be subject to a variable rate of interest that will be based on Prime Rate as published in the WSJ in effect on the change date. This interest rate may change on April 5, 2024…

It continues on about change dates but seems like standard verbiage. Thank you for your help!

Jen

 Variable Rate Mortgage Loans can be complicated - probably need to see all the language in the doc (above and beyond the verbiage you posted above) to really get a true understanding.

Generally - you need to get a handle on the following:

Change Date - How is this defined - sometimes its every month, every six months, every year etc

Interest Rate Calculation - Typically this is going to be an Index Rate (in this case looks like WSJ Prime) PLUS a margin or additional amount.  The margin appears to be missing from what you have posted

Cap - Generally, there will be a maximum cap or ceiling where the rate can't go above, even if it would be calculated that way (example - cap is 8% and Margin+Prime is 9%, its 8% - ceiling overrides the calculation).  You have 3.65% in the above, if that is accurate - then it is a very under-market note

Floor - There will also likely be a "Floor" that works the same as cap but in the opposite direction

Periodic Cap - there are also typically periodic caps to prevent against rate shocks written in - so need to check for that as well

Maturity Date - somewhat relevant, but based on the above, very important to this specific note situation