What Is a Permanent Loan?

Permanent Loan Explained

Prospective buyer and broker measuring property
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A permanent loan is any loan with a longer-than-normal term, though it’s not actually permanent. These loans are usually taken out for commercial real estate through a bank, credit union, or life insurance company and are amortized over 25 years.  

However, if the property is over 30 years old and showing extreme signs of wear and tear, your lender may amortize the loan sooner. In fact, according to the Office of the Comptroller of the Currency, “prudent” lenders generally consider 30 years to be a reasonable maximum life of a loan for real estate.

Below, we’ll take a look at how a permanent loan works and outline the pros and cons to help you determine if it’s right for you. 

Definition and Examples of a Permanent Loan

A permanent loan is a loan that comes with an unusually long term and is typically taken out on commercial real estate to cover development costs, interim loans, construction loans, and financing expenses. These loans tend to come with lower interest rates and are often issued by banks, credit unions, and life insurance companies.

The loan minimum and maximum loan amounts will depend on the lender you use. For example, let’s say you want to get a first loan on a commercial property, but are not sure where to turn. Banks tend to offer more flexible commercial loan terms, and can provide permanent loans from $100,000 up to $100 million (as can private equity firms). In comparison, credit unions can offer maximum loan amounts between $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?

Permanent loans can come with extended terms and are often used to purchase commercial real estate. These mortgage loans are generally issued to developers for the purposes of building and selling purposes after they’ve obtained a construction loan (more on this below). However, borrowers who want to remodel their home or build a new one have their own permanent option with a construction-to-permanent loan program.

This program takes you through the entire process of financing and completing a construction project with just one loan. It allows you the flexibility to afford to build a new home while living in your current one, or simply renovate your current home.

It starts as a construction loan, but once the construction is completed, you’ll work with your lender to change it to a permanent loan. That way, you don’t have to obtain separate lots and can simplify the financing process. In addition, you’ll only have to pay closing costs once. 

Types of Commercial Real Estate Loans

Permanent Loan

A permanent loan is a form of long-term financing, and these loans typically amortize at 25 years. They tend to come with low interest rates and are usually offered by banks, credit unions, and life insurance companies. 

Construction Loan

A construction loan is a short-term loan that provides the funds to build a new home or business structure or renovate one. Once the home or business is built, the occupant must apply for a mortgage to pay for the completed home.

These loans tend to come with high interest rates and generally, payments begin six to 24 months after the loan is issued.

Bridge Loan

Bridge loans are short-term financing, and they are usually used to pay off your current mortgage. This frees up equity to be used toward purchasing another home or property. Once the home or property is sold, the proceeds from the sale will repay the loan. 

Permanent Financing vs. Short-Term Financing

The table below outlines some key differences between permanent and short-term financing.

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

Permanent financing is a form of long-term financing. The loan terms are at least 12 months, though most loans are much longer. 

These flexible loans give you several options for your repayment schedule, including monthly, annual, or small lump-sum payments. 

In addition to real estate, permanent financing can also be used to purchase fixed, long-term assets such as equipment and machinery.

In comparison, short-term financing typically must be repaid within a year and is usually paid off in a single lump-sum amount. These loans are usually taken out to fund short-term projects such as renovations. 

Pros and Cons of a Permanent Loan

Pros
  • Comes with 100% financing

  • Choose your own builder

  • Use it renovate or build a new home

  • One-time closing

Cons
  • Complex loan product

  • Delays are possible

Pros Explained 

  • Comes with 100% financing: You can finance the entire construction project, and the funds are dispersed as the work is completed.
  • Choose your own builder: This loan allows you to pick your own builder.
  • Renovate or build a new home: You can either renovate your current home or build a new home. 
  • One-time closing: This convenient loan program allows you to close once, saving you money in closing costs. 

Cons Explained

  • Complex loan product: This is a complex loan product with many moving parts.
  • Delays are possible: One of the most challenging aspects of these loans is the possibility of delays due to issues with materials and quality disputes.

Key Takeaways

  • A permanent loan is a loan with a longer than usual term, though it’s not actually “permanent.” 
  • These loans are often taken out for commercial real estate and often amortized over 25 years.
  • Many people also use a construction-to-permanent loan program to either renovate their current home or property or build a new one. 
  • Construction-to-permanent loans allow you to choose your own builder, come with 100% financing, and close once on your loan. 
  • The construction-to-permanent loan program can be complex and come with the possibility of delays.