Whether you are a business owner or an investor, there may come a time where you’ve probably considered refinancing your existing mortgage. Commercial real estate investors often end up in situations where it makes sense to refinance their existing property mortgages and avail new loans for various reasons.
Whether you heard that there is a drop in loan interest rates or that you think your increased credit score can now land you better loan terms and conditions, mortgage refinancing can be a good option for many reasons. This blog is an overview of what is Commercial Mortgage Refinancing, what are the cases where mortgaging makes the most sense, how Commercial Real Estate Refinance through mortgage refinancing works, and what are the general eligibility requirements that you need to meet to avail a mortgage refinance. Read on so you can make an informed decision about your Commercial Real Estate Refinance.
What is Commercial Mortgage Refinancing?
Commercial Mortgage Refinancing is the process of paying off an existing mortgage loan by availing a new mortgage loan with improved terms and conditions, either to capitalize on the better terms of the new loan or to avoid large balloon payments at the terminal of the loan period of an existing loan. Commercial Mortgage Refinancing has many benefits to offer which makes it very popular among the savvy commercial real estate investors.
What are the cases where mortgage refinancing makes the most sense?
Commercial Mortgage Refinancing has existed for a long time now. In some situations of commercial real estate investing, availing a mortgage refinance makes the best sense and it lowers the financial burden on an investor to a large extent. Here are some best reasons to refinance your mortgage.
#1 – Lower interest rates
Lower interest rates are probably one of the top reasons as to why an investor would consider a commercial mortgage refinance. Although the rates on an average and by the market rate standards are increasing, they are still low historically. Being on a lookout for such refinancing mortgage loans might just open you up to the possibility of replacing your existing loan that has a high-interest rate with the one that is lower. Lower interest rates will not only reduce your financial burden in the long run but also cut down your monthly out-of-pocket expenses to a large extent.
#2 – Cash-out refinancing helps in getting immediate cash for property restructuring or repairs and renovations
Cash-out refinancing is a popular type of mortgage refinancing where you get the loan based on the equity that you have in the property already. This will provide you with immediate funds that you can use for future improvement of your property or in the repairs and renovations of the property. Typically, a commercial bridge loan is also taken when a property investor wants funds for meeting the repairs and renovations purpose of a proper building, but if you do have a considerable amount of equity in the property, a cash-out refinance can be a better option.
#3 – For improving an overall cashflow
A reduction in the interest rate immensely helps in reducing your monthly loan liabilities. This helps you in generating better cashflows and you can utilize the surplus funds for other investing ventures. This also allows you to explore other hobbies and interests outside of investing and consider new types of projects like entrepreneurship and the like.
#4 – Favourable loan terms
The next big reason why commercial real estate investors are interested in refinancing their mortgages is the favorable loan terms. Favorable loan terms can mean anything and varies from one investor to another. You may want to switch your fixed-rate loan to an adjustable-rate loan so that you can save up on the fluctuating market loan rates.
Likewise, on the other hand, you may want to switch to a fixed-rate loan so that you have stability and you know exactly how much you will be spending every month towards your loan liability. Similarly, you may want to extend the loan period of your loan so that you save up on the monthly payments or the other hand, switch to a loan with a shorter period so that you can save on the long term accumulative interest costs. Thus, depending on your financial positions and preferences, you should decide on the favorable loan terms.
#5 – For avoiding large balloon payments
Another significant reason why commercial real estate investors consider mortgage refinancing is that they try to avoid large balloon payments. Balloon payments can seem like a huge burden and it’s especially very frustrating when you’re having a bad financial crisis. At times like that, the best thing to do would be to refinance your loan so that you save up on such balloon payment expenses and fully amortize your loan without the liability of making one large payment at the end of the loan term. Many investors consider a Commercial Real Estate Refinance when their impending balloon payment is around the corner and they want to avoid it.
Also Read – Digging Deep Into Commercial Refinance Loans
How does Commercial Real estate refinancing work?
Commercial real estate refinancing starts from the selection of a lender just like any other loan. Depending on your financial circumstances and obligations, you should first choose a lender to work with.
After choosing a lender, you will be needed to fill out a loan application form for the lender specifying all your requirements. Your lender might ask you to submit a few documents at this stage like your income statements or bank statements concerning the transactions of the past 2 years, income tax returns and so on.
After submitting your loan application, the lender’s underwriting team will be handed over with the job of verifying the documents submitted by you and also appraise the property value. This process determines whether or not the lender is going to refinance your loan.
After the underwriting process, you will know whether your loan will be refinanced by a particular lender or not. If yes, you will go-ahead to the final step which is paying off the closing costs, receiving a couple of documents and getting the finance you needed and if not, your search for another commercial real estate refinance lender begins.
What are the general eligibility requirements that you need to meet to avail of a mortgage refinance?
Just like your original loan, your refinanced loan too would have the basic eligibility criteria that need to be met by you. Most lenders who provide Commercial Real Estate Refinance loans typically have the following general eligibility requirements:
#1 – Your credit score
Most of the lenders who provide Commercial Real Estate Refinance loans would be interested in your credit score. Personal credit score lets the lenders understand if you are responsible for your money and it gives them a clear picture of your repaying abilities. Weightage for such personal credit scores is even more increased when it comes to Commercial Real Estate Refinance as lenders are tad bit skeptical as to your reason to refinance the loan in the first place. If it is a large balloon payment that you are primarily trying to avoid, they’d want to feel reassured about the loan given to you.
#2 – Business credit score
If you are running a business, your lenders would also be interested in knowing your business credit score. A business credit score is typically calculated by considering factors like industry risk, company size, length of credit history, current debts, repayment history and so on.
#3 – Time period of owing the property
The next thing lenders would be interested in knowing is the period for which you have owned the property. This will determine the interest you’ve had vested in the property and your equity in the property is something that provides them a sense of security and assurance about the repayment of the loan. Most lenders will require you to have owned a property for a specific period before they decide to refinance your loan.
#4 – Your repaying ability
Lenders want to know that you can repay the loan and the associated interests on time. To determine this, they use different ratios and one of the most commonly used ones is the Debt Service Coverage Ratio (DSCR). This ratio is determined by dividing the net operating income of your business by the annual loan repayments and it tells a great deal about your existing loan repaying abilities. In cases where investors or business owners have poor credit scores due to an unduly defaulted loan but have a solid Debt Service Coverage Ratio as their business boomed, this can be a very helpful criterion. In a typical scenario, lenders would want you to have a DSCR of 1.2 and more. In other words, the net operating income of your business should at least be 20% more than the annual loan repayment costs.