Refinance is regarded as one of the easiest ways to raise funds. A mortgage gives the lender the cover of a lien that takes care of non-repayment. Hence, mortgages have relatively faster processes and eventual disbursement. From the perspective of a borrower, the need for refinancing could be attributed to one of many reasons. Eligibility to avail a refinance should not be the criteria to avail one.
Rather the end should justify the means. Regardless of how easy it is to avail commercial property refinance, it is always essential to ensure that the need is pressing. The logic is pretty simple – as a commercial property owner, the repayment burden is on you.
Therefore, before you ink an agreement for refinancing, ensure that you have a good enough reason. Here are some reasons that are considered as justified to refinance a commercial mortgage. Before that, let’s take a quick look at the commercial property to refinance.
Different Types of Commercial Mortgage Refinance
Property owners who wish to extract equity from the possessed properties typically rely on the cash-out or build out option. This refers to the condition wherein the property’s actual value is more than the mortgaged balance of the property. The owner then makes this difference in value to free up some funds that can be used for any purpose.
Debt refinancing programs are another option wherein the property owner gets a refinance of 90% of the property’s value. Various parameters are used to arrive at the actual value that can be disbursed, with the maximum being 90%.
Various commercial property refinances options offered by lending institutions give property owners a good choice. Here are some of the compelling reasons that push a property owner into opting for refinancing.
#1. Overcoming Balloon Payments
Balloon payments at the end of the term of existing mortgages can be overwhelming at times. For instance, as a property owner, you may have taken out a mortgage based on your earnings calculations. You may have expected things to work out in a particular way.
Based on your expectations, you may have chosen a mortgage wherein your repayments are staggered with a balloon payment at the end to mop up the loaned amount. However, things may not have worked out in your favor.
In other words, you may have repaid the interest on time throughout the tenure of the mortgage. However, you may not be able to repay the sizeable balloon payment around the corner. The best option is to go in for commercial property refinance. This will take care of the balloon repayment and give you more time to arrange a huge amount. If to manage to get the funds, you still have the option of foreclosure, albeit with costs.
One of the most compelling reasons for commercial property refinance is balloon payments. This is certainly justified as you are literally without any other option that is as easy as refinance to handle the repayment.
#2. Restructuring repayments with present interest rates
Market influences drive interest rates. In other words, this essentially means that various factors determine the rate of interest, and consequently, the interest rates fluctuate. You may have opted for a mortgage at a higher interest rate, as that may have been the prevailing rate at the mortgage time. You may find it challenging to repay the mortgage at the rates. With refinancing, you have the option of lowering the interest rate to present market rates.
This will help ease your burden. However, this entirely depends on the prevailing market rates and the lender. In most cases, refinancing helps reduce the interest rate marginally. While it may be marginally in terms of the percent of interest, it may work out to a sizeable difference depending on the amount involved.
This will reduce your monthly exposure or liabilities, and give you the freedom to use the saved amount for other expenses. This will also help you manage your credit score more effectively as you are less likely to skip the repayments when you have a good option. This option is certainly justified as it is a prudent decision that helps you to free up funds.
#3. Re-arranging Mortgage Term
Re-arranging your mortgage term can work both ways. For instance, you may wish to finish your mortgage repayment term faster, to enable you to use the excess funds for other purposes. A long mortgage may tie you down and leave you with limited scope to handle your expenses.
By completing the repayment faster, you are left with more funds at your disposal. If you desire to have more disposal revenue or greater control over how you get to spend your money, then a commercial property refinances a good option. With this, you can quickly finish your mortgage commitments, reducing your liabilities.
Additionally, you get the advantage of lesser interest rates. A refinance will mostly give you the advantage of lower interest rates. Not only will you get the benefit of liberating yourself from the burden of repayments, but you will also have the benefit of having reduced the interest exposure. This is a win-win situation because the shortened term and reduced interest may add up to a significant savings amount.
Similarly, this option is also suitable when you want to extend the term. This is an extremely compelling situation, where you may have found it virtually impossible to make the payouts.
By refinancing, you can extend the term and thereby lower the monthly commitments. However, this will see you paying more over the longer-term. Both the reason is justified, and you only need to ensure that you have worked out the numbers to your advantage.
#4. The Benefit of Switching Over to a Better Mortgage Type
Different types of mortgages have varied metrics for calculation of interest rates. You may find yourself locked into an unfavorable type of mortgage. For instance, a mortgage type that was good/suitable at the time of taking out the mortgage may not necessarily be the best option at a later stage.
You may find the mortgage at present to be less favorable when compared with presently available options. A will help you to switch over to a more suitable type of mortgage. This is a prudent decision and will entirely depend on the timing and the availability of a better option.
For instance, an adjustable-rate mortgage is determined solely on the prevailing market rates. It may have been a good choice earlier but may have ceased to be the best option when market factors changed. A fixed-rate mortgage gives you the advantage of knowing how much you will pay every single month.
You get complete visibility of your repayment and can, therefore, plan your income and expenses accordingly. However, there is a downside to this option. A fixed-rate mortgage that has been fixed sometime earlier may suddenly cease to be a good option if the prevailing market rates are considerably lesser than the fixed rates.
Therefore, it may be a good option to go in for refinance to make the switch to a better rate. Refinancing a commercial mortgage to get a better deal or interest rate or type of mortgage is certainly a prudent option.
Other reasons are attributed to the refinancing of a commercial property mortgage. It is necessary to weigh the options carefully before taking the plunge. Because refinance involves fees and closing costs. You need to ensure that the overall benefits outweigh the costs and the processes involved.
There is no point in taking out a refinance if the end does not fetch you reasonable benefits or if it does not help you resolve a problem.