Refinancing your commercial loan as it approaches its term is a smart money move for your business. As our unpredictable market continues and interest rates keep climbing, locking down a good loan to help you grow your business for years to come is crucial. If you’ve been dragging your feet, consider these top 3 “Reasons to Refi”:
• You have 1-2 years left before your loan “terms”
• Your loan is about to or “balloon” leaving you with an inconvenient payoff
• Your loan is about to reset its interest rate, EEK! (for an Adjustable Rate Mortgage)
When looking to refinance, make sure that you’re considering the most important factors that drive up your borrowed money costs. These factors include rate, terms, amortization, and loan costs.
Depending on your lender, these factors can be customized together to create your perfect new loan—or they can be deceptively strewn together to become one big, money-sucking nightmare.
Rate – Beware of ARMs
Most commercial banks offer Adjustable Rate Mortgages(ARM) for commercialreal estate. Utilizing ARMs protect the lender’s risk when rates are rising. An ARM can start with a lower start rate than many fixed rate loans. Since the lender’s risk is protected by the adjustable rate feature, their overall risk is lower, thus the rate may look more attractive to you, compared to a fixed rate option. Many refer to these as “teaser” rates, or rates designed to get your attention while in reality they end up costing much more throughout the term.
Buyer beware: the cheapest “start rate” may not be in your favor for the long term.
Most investors like you would prefer a fixed rate in a climate of uncertain or rising rates. A fixed rate term is normally available through the banks in increments of 5, 7 and 10-years. There are also combination options that, for example, may offer 5-years plus a 5-year renewal at a set percentage point. From a 5-year fixed “base rate”, most lenders add a small premium to go up to 7 or 10-years fixed rate. This is just a general guideline, and all lenders vary. With our private lenders, we have special programs with terms of 15 to 22.5-years, giving you more time to pay off the principal.
Amortization refers to paying down the principal loan in consistent, equal payments for a set amount of time. Depending on the type of property, commercial money generally amortizes for 20 to 25-years. A longer length of amortization pays principal down only slightly slower, and will keep your Debt Service Cost lower while keeping your Return on Investment (ROI), higher. Unlike big banks, our programs can amortize up to 30 years.
While there is no avoiding standard closing costs and recording fees, appraisals and environmentalreports and updated surveys (when applicable), there are certain items that pile up to raise the overall cost of refinancing. Banks are infamous for this! Interest rate buydowns, loan origination fees and junk fees can add to the cost, and add to the overall amount that you’re paying interest on. When using a “wholesale” firm like ours, lender discount fees are either heavily reduced or nonexistent, thus only our fee is included as a cost.
When it comes to refinancing, taking all these factors into account is the best formula for making a good business decision. If you’ve been waiting to refinance, contact our specialists today to discover the solutions that our lenders can provide for your business.
Remember—we don’t play by their rules. When the bank says “NO” to longer terms and low, fixed rates— WE CAN SAY YES.