Are you looking to take advantage of a lower interest rate on your commercial property mortgage? Do you need to take out money in order to make improvements or renovate your property? Or do you need some cash to invest in an entirely new property? If this sounds like you, it may be time for you to see if refinancing your commercial property mortgage would be the right choice for you.
You may be thinking, "What's the difference between refinancing a commercial property mortgage and refinancing a home?". Well, refinancing commercial property means that lenders will look closer at net operating income, and other factors that impact how much money a property brings in, while refinancing a home means that a lender would look at personal credit score, and whether or not the person applying for the loan would be able to pay it back. With commercial properties, lenders will be closely analyzing whether the tenants will bring in enough money by paying rent to pay off the commercial property mortgage.
Why should you refinance your commercial property mortgage?
Your main goal when refinancing commercial property is to get a lower interest rate because that will allow you to take advantage of the savings provided by the lower rate and longer loan terms. This will usually lead to smaller monthly loan payments and reduce your total debt.
Additionally, refinancing your commercial loan can help you avoid paying a large balloon payment near the end of your loan term by redefining the terms of your loan. This balloon payment typically occurs when a loan does not fully amortize over the loan length, leading you to pay off a large amount of the remaining balance at once. These payments can be upwards of twice your monthly loan payment, which makes them a difficult surprise to pay for when the time comes. This balloon payment is more common in commercial property mortgages than it is in other types of loans, so it's something you should be especially aware of as you consider refinancing your commercial property mortgage.
How do you refinance your commercial property mortgage?
First, you have to choose a lender to work with. At this stage, you have a couple different options to choose from. Once option is that you can choose to refinance your loan through the SBA's mortgage refinancing enhancement program. Many conventional lenders use the SBA enhancement program to refinance loans because the SBA will cover a large portion of the loan if you end up defaulting on your loan.
Another option is to choose a conventional bank commercial mortgage, which is usually the best option for those who are looking to lower their monthly payment. Bank's typically have good rates and offer longer term options for refinancing commercial property.
The final option is to choose a private lender, whether through an individual or an investment group. They typically offer all kinds of commercial mortgage financing options for you to choose from.
When choosing a lender, pay attention to the fee differences between your options and choose the one that is the best deal for you. You may even be able to work with the same lender that gave you your first loan.
Once you choose a lender, you have to provide the information that they require. Typically, lenders will review the net operating income of the business owner, which is the income on a commercial property minus the cost of managing the property. The NOI is calculated every year and is one of the most influential things a lender will look at when deciding to refinance your mortgage, which means that it's important for your commercial property to be making sufficient income in order to refinance the mortgage.
Some lenders want to see that you have owned your property for a certain amount of time, such as one year, before considering refinancing your loan. Lenders may ask for other information that proves you're more likely to make your loan payments on time and pay off the entire loan.
Lenders will also review all available collateral that a business has to offer as well as the cap rate, which is the measure of the property’s value as a profitable business. Lenders can also choose to look at other factors to determine whether or not to refinance your loan.
At this point, your lender will work with you to redefine the terms of your loan and assist you with taking the new loan out. Most loan terms are between 10 and 25 years, but it is sometimes possible to fast rack this so that the new loan term is between 1 and 10 years.
Things to Remember
It's important to only refinance if you can get a lower interest rate on your mortgage and if the money that you save by refinancing offsets the cost of refinancing. You need to remember that there are additional fees that come along with refinancing. Typically, you need to get your property reappraised, which usually costs at least $2,000. There will also be processing fees that vary between each lender and it’s a good idea to compare these fees before deciding which lender to refinance with. It’s a good idea to choose a lender that has a maximum cap on their fees so you aren’t paying more than you should for your refinancing.
You may also have to pay for a variety of services, such as surveys and inspections for local government or state requirements, attorney fees at closing, protection and indemnity insurance, or title insurance. Closing costs can also have a large impact on how much you pay to refinance, especially because you often have to pay them upfront. Typically, the closing cost is between one and two percent of the refinanced amount.
If you have more questions or would like to start your refinancing commercial property process contact us for more information. Not familiar with investment real estate? Check out our our Guide to Investment Real Estate for more information.