Refinancing Commercial Property Mortgage is a practice that’s been around from the time the real estate investment lending business was shaped! It’s an old practice that is as relevant and as widely used as it was earlier.
Refinancing your commercial property mortgage has many benefits to offer. This blog is an overview of what Commercial Property Mortgage Refinancing is. It tells you about reasons to refinance your commercial property mortgage.
You will understand the difference between a commercial property mortgage refinance and home loan refinance and how to choose the best lenders in the market to refinance your commercial property mortgage. Read on.
What is Commercial Property Mortgage Refinancing?
Commercial Property Mortgage Refinancing is the process of replacing your old mortgage or mortgages with a new lease which has a lower rate and better terms.
The proceeds of such new loans are applied towards paying off the old mortgage and using the rest of the money as an investment by making repairs and renovations to the property or by merely using it for other purposes.
Put it simply; Commercial Property Mortgage Refinancing means availing a new loan with better terms to pay off the old loan.
Now, why would someone be interested in buying a new investment to clear an old loan? Why should you consider doing this? Given below is a list of reasons on why you should refinance your commercial property mortgage.
Reasons to refinance your commercial property mortgage
Reason #1 – New loans can help you reduce your long term debt
Refinancing your commercial property mortgage makes sense only when you’ve found a better investment – meaning, an investment that provides lower rates and longer terms. By availing such a loan, you end up saving a lot in the long run, and your overall loan expense would be much lesser once you’ve made the switch to a new loan.
Reason #2 – New loans can help you take advantage of the changing market loan rates and make a shift from fixed mortgage to a fluctuating one and vice versa
At the time of availing your loan, you would only have a little idea about how well this loan is going to work out for you. Whether you choose to take a fixed loan rate mortgage or a fluctuating loan rate mortgage, you might always be in for some unexpected changes in the market rates.
For instance: Let’s say, you have taken a fixed-rate mortgage and are paying the same interest charges every month. If you learn about a new fluctuating loan rate mortgage whose interest rates are much lower than your fixed-rate mortgage, then it does not make sense for you to stick with the same loan.
Making a shift can help you save you a lot in the long run. Such changes and fluctuations could be one of the reasons why you should refinance your commercial property mortgage. Remember that when you’re making such a switch, always consider the trend and patterns of such loans.
It might be tempting to change the terms of your loan by availing a new loan, but it might not always be best for you and you may end up paying more in the guise and attempt of spending less.
Determining when to refinance your commercial property mortgage is an important question, and the answer to this is highly subjective.
Hiring an expert in the field is highly recommended because it keeps you covered from the potential risks of making a wrong decision.
Some people get the whole concept of Commercial Property Mortgage Refinancing wrong. Refinancing does not mean to continuously buy newer and better loan every time you come across one.
It needs to be made after due research and only after being assured that purchasing this loan is definitely going to lead you more savings or bring your costs down to a significant extent!
Reason #3 – Refinancing helps reduce the monthly loan payments
Some investors struggle with making their monthly payments on time. Although there could be many reasons behind this, one of the primary reasons is the inadequate rental income that the property generates.
Many investors misjudge their projected monthly rental income statements and thus make the wrong decision with respect to choosing the right loan, right from the very first step.
This leaves them struggling every month in order to clear off monthly dues. Refinancing is a boon in such cases where you can replace an old loan with a new credit in the market that has much lower rates and more extended periods, making your monthly loan liabilities minimal.
Reason #4 – Refinancing can help generate higher cash flow from a commercial property
The three reasons explained above helps save on costs while these reasons help in creating higher cash flow from a commercial property. This happens when an investor decides to take cash out on refinancing.
When you make a cash-out refinance, you are provided with funds that you can use in making repairs, adding specific areas like a garden, laundry area, better parking space, etc. that will justify your rental increase later.
Your tenants, in most cases, would be happy to pay higher rents in exchange for better facilities in the Commercial Property. Thus, if planned and executed well, refinancing can work wonders in generating a higher cash flow from your commercial property.
Reason #5 – Refinancing lets investors dodge the hefty balloon payment that needs to be paid near the end of an existing mortgage
Most Commercial Property mortgages come with a massive balloon payment that is to be made at the end of the loan term. These balloon payments can be a considerable cash-out, and investors may not be in a place bear the expense of a large balloon payment.
In such a case, refinancing helps investors to dodge such huge balloon payments. It can be very timely, especially when a balloon payment can be thousands of dollars, and investors don’t prepare for such expense! So, refinancing is a real rescue.
What is the difference between a commercial property mortgage refinance and home loan refinance?
When it is about commercial property mortgage refinancing, lenders are looking at the Net Operating Income of the property and rules and regulations laid out in the rental agreement.
Net Operating Income refers to the income generated from a commercial property after deducting all the related expenses. Rental rules and regulations apply to the terms of understanding that is laid out in the rental agreement which defines the rental terms, rates, payment deadlines, responsibilities of repairs and maintenance in the property and so on.
The bottom line is that lenders are interested in knowing if the income generated from the property can pay back the loan amount. So, the primary thing lenders will look at while considering Commercial Property Mortgage Refinancing is the Net Operating Income of the property.
On the other hand, when it comes to refinancing a home loan, lenders are interested in your credit score, credit history, the income-generating capacity of the borrower and the property value.
Bottom-line: With Commercial Property Mortgage Refinancing, the higher the NOI of the property, the better loan terms you can get. Conversely, if the NOI of the property is not up to the mark, the chances are that your refinancing loan approval will probably denied.
How to choose the best lenders in the market to refinance your commercial property mortgage?
1) Fees and charges
The first thing to look for to determine your best lender in the market is the fees lenders are charging. A refinance loan deal would look at the minimum requirements the lender to appraise your property. Appraisal charges and the processing fees together will determine how much you’ll be paying your lender to get a loan to refinance.
2) Experience, knowledge, and expertise of the lender
No thumb rule says – go for the one that provides the cheapest rates in the market. You must look at the experience and knowledge of a lender too. Commercial real estate lenders can often offer the best insights on real estate investing on many fronts. Thus, instead of basing your decision of choosing a particular lender solely on fees, you should also consider their knowledge while ensuring that you aren’t overpaying.
3) The closing costs
Closing costs are something that can be easily overlooked by investors or borrowers, as most people assume that their expenses are going to be minimal. However, the converse is true sometimes. Some lenders can charge high closing costs which you might not be prepared to pay up. Hence, ensure that information of the closing costs of your new Commercial real estate loan refinance before you go ahead with any step.