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Is the Time Right to Refinance Your Commercial Loan?

Planning Your Future

As interest rates hovered below what once was considered the “glass floor,” first mortgages and commercial real estate loans, as well as refinances (even multiple refis) followed in droves.

Now that rates have crept back up, does it still make sense to refinance?

That all depends on your situation. Let’s explore some reasons why it may or may not be a good time for you to refinance a commercial loan, as well as next steps if the iron is hot.

Person signing documents

Major benefits

At the current rate environment, it makes sense to consider refinancing if you haven’t already. Here are a few factors in your favor:

  • You’ll likely lower your monthly payment. Even when interest rates were steady at about 7%, commercial property owners could usually find better rates for their commercial real estate loans. Today, interest rates are around 5%, so refinancing could result in savings each month no matter your loan term. Here’s an example:

    You have a $1 million commercial real estate loan with a 25-year term with a 5.80% interest rate. Your monthly payments are about $6,300 and you’ll wind up paying $1.9 million over the life of the loan. If you refinanced at 5.00%, your monthly payments would fall to about $5,800 and your total payments will be just over $1.75 million.

  • You might get more favorable loan terms. Whether you’re looking to pay off your loan faster, possibly at the same monthly rate, a refi is a great way to get you there. If you currently have an adjustable-rate mortgage (ARM), locking in to a low-rate fixed commercial real estate loan now may help provide more stability later as rates go up.
  • You can use a cash-out refinance to grow or expand. By borrowing more money than you currently owe, you can use the extra cash to make improvements to your existing properties, invest in other properties, or fuel growth in your company.

Potenial roadblocks

Always weigh the good with the bad. Here are some of the more prominent reasons why a refinance might not make sense:

  • Long-term savings can come with upfront costs. Any mortgage loan you take out will have closing costs. There’s no getting around it. When refinancing, just make sure the overall savings you’ll enjoy outweigh the hit you take upfront.
  • Refinance criteria, “sunk costs” may weigh heavily. Small Business Administration (SBA) 504 loans are popular and can be used to refinance federally guaranteed loans, including existing 504 loans as well as 7(a) loans. However, to get there you’ll absorb a lot of sunk costs from your existing loan—you won’t be able to recoup all the fees, title costs, and third-party work that went into the existing mortgage—and the refinance will need to be a “substantial benefit” to your business. Not only that, but by using the SBA programs for a refinance, you’ll also be subject to new fees and must qualify under a few requirements, including:

    • The business must be in operation for at least two years.
    • The mortgage to be refinanced must be at least six months old.
    • The existing first mortgage or refinanced loan must have been used for an eligible SBA 504 project.

    Bottom line: Be sure to contact your lender to determine if a refinance would be substantially beneficial for your situation.

  • You could face “exit” penalties. If you settle a current debt by refinancing, you may have to pay a prepayment penalty. (For certain SELCO commercial loans, a prepayment penalty will be assessed when refinancing.) Also, be mindful of the possibility of additional prepayment penalties if you choose to refinance or pay off your loan early again down the road. Again, make sure the long-term savings outweigh this initial expense.

If you’re on solid financial footing and would like to lower your monthly payments, change your loan terms, or tap into equity for improvements, there’s no better time to contact SELCO Commercial & Business Banking to get the ball rolling on a commercial loan refinance.

“It’s easy to work with us, and we focus our lending within the communities we live,” said Mike Donaca, Vice President of SELCO Commercial & Business Banking and Senior Commercial Credit Officer. “If you’d like to learn about our low rates, cashing equity out of a property to better your ability to think bigger—and act quicker—or to consolidate business debt to improve monthly cash flow to position for growth, we’d be an excellent first call to make.”

To explore commercial lending further, contact one of SELCO’s Commercial Loan Officers today.

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