Loan Basics - Refinance

When I should refinance?

It is often said that you should refinance when mortgage rates are 2% lower than the rate you currently have on your loan. However, refinancing may be a viable option even if the interest rate difference is substantially less than 2%. A modest reduction in the loan rate can still trim your monthly payment. For example, the monthly payment (excluding taxes & insurance) would be about $6,321 on a $1,000,000 loan at 6.50%. If the rate were lowered to 4.50%, the monthly payment would be about $5,067, a monthly savings of $1,254. The significance of such savings in any scenario will depend on your income, budget, loan amount and the change in interest rate. Your trusted lender can help calculate the different scenarios.

Should I refinance if I plan on keeping the property only a short period of time?

Well, that depends on numerous factors. Most lenders will charge fees to refinance a loan. If you plan to stay in the property for less than a couple of years, your monthly savings may not have the opportunity to accumulate and recoup these costs. Let's say a lender charged $10,000 to refinance your loan, but it resulted in a monthly savings of $500. It would take 20 months (10,000 divided 500) to recoup the initial costs before you start to realize some savings. Some lenders will charge a slightly higher than average interest rate on refinance loans, but waive all costs associated with the loan. The attractiveness of these loans will depend on the interest rate you are being charged on your current loan.

How much will it cost me to refinance?

In addition to a commercial loan application deposit ($2,500 - $5,000, can be much greater for larger loans) you will likely have to pay an origination fee (typically 1% to 2% of the loan amount). In many cases you will have to pay much of the same costs that you had to pay with your current commercial mortgage (title search, title insurance, misc. lender fees, etc.). The sum of these fees could cost you up to 2% to 3% of the loan amount. If don't have the money to pay for associated loan closing costs, you may wish to explore “no-cost” loans. These loans will charge a slightly higher interest rate, so ask a lender if it would still make sense to refinance using this type of program.

What are points?

Points are costs that need to be paid to a lender in order to receive mortgage financing under specified terms. A point is a percentage of the loan amount (one point = one percent of the loan). One point on a $1,000,000 loan would be $10,000. Discount points are fees that are used to lower the interest rate on a mortgage loan (you are discounting the interest rate by paying some of this interest up-front). Lenders may express other loan-related fees in terms of points. Some lenders may express their costs in terms of basis points (hundredths of a percent). 100 basis points = 1 point, or one percent (1%) of the loan amount.

Should pay points to lower my interest rate?

If you plan on owning the commercial property for at least a few years, paying discount points to lower the loan's interest rate can be a good way to lower your required monthly loan payment (and possibly increase the loan amount that you can afford to borrow). If you only plan to stay in the property for a year or two, your monthly savings may not be enough to recoup the cost of the discount points that you paid up-front. Ask your mortgage professional how long it would take for your monthly savings to recoup the costs of the discount points. This is known as a “Payback Period.”

Should I lock-in my loan rate?

No one knows for sure how interest rates will move at any given time, but your lender may be able to give you an estimate of where it thinks mortgage rates are headed. If interest rates are expected to be volatile in the near future, you may want to consider locking your interest rate if rising rates will no longer allow you to qualify for the loan. If your budget can handle a higher loan payment or if the lender's lock fee seems excessive for your means, you might want to consider allowing the interest rate to 'float' until the loan closing.

I've had credit problems in the past. Does this impact my chances of getting a commercial loan?

Obtaining a commercial property loan is still possible even with less than stellar credit. If you have had credit problems in the past, a lender will consider you to be a risky borrower. To compensate for this added risk, the lender will charge you a higher interest rate and usually expect you to pay a higher down payment on your commercial property purchase (typically 20-50% down). The worse your credit is, the more you can expect to pay for an interest rate and the larger the down payment which will be required. Not all lenders choose to lend to risky borrowers, so your mortgage professional will be extremely helpful in this regard.

I've been late a couple of times on my credit card bills. Does this mean I will have to pay a higher interest rate?

Not necessarily. If you have been late less than three times in the past year, and the payments were no more than 30 days late, you probably have a pretty good chance at getting a commercial property loan at a competitive interest rate. Lenders guidelines will vary, but most lenders will excuse a couple of minor 'late-pays' as long as the borrower can provide a reasonable excuse explaining them (i.e. job transition, illness). If the late-pays were 60+ days late and cannot be explained, you may have to settle for a higher interest rate. Of course, the higher your credit score, the more smoothly the entire commercial loan process will go!

How can I find the best deal?

When comparison shopping among mortgage professionals, remember that a lender can structure financing for a borrower several different ways. A lender can charge higher fees and offer a low interest rate while another may charge a slightly higher interest rate with lower fees. In order to make an 'apples to apples' comparison between lenders, ask each lender what their interest rate is for a zero discount point loan (based on a 30 or 60 day lock period). Then ask each lender what they charge for an origination fee, as well as any other fees they typically charge for a loan, (i.e. broker, processing, underwriting). A reputable lender will not hesitate in answering these questions.

Should I choose the lender with the lowest interest rate and costs?

There are primarily two things to consider when choosing one mortgage professional over another: the quality of service being provided and the cost of services provided. Quality of service is especially important to those who have never purchased a commercial property, or do not have the detailed expertise it takes to fund a commercial property financing task. When comparing mortgage professionals, ask each one several questions before you fill out any loan application. A good lender should be able to get you through the financing process leaving you confident that you made a sound financial decision. If after a few questions and a brief conversation you do not feel comfortable with the mortgage professional, simply call someone else.
 
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