On September 18, 2019, the Fed reduced prime interest rates for the second time in 2019. With falling interest rates, you may be considering a refinance of your commercial property. There are many reasons why this could benefit your business. Perhaps you want to look into a cash-out refinance to utilize the equity you’ve been building in your property to use for renovations or other investment activities. Maybe you want to switch from a variable to a fixed rate in order to lock in some financial security. Perhaps you have an upcoming balloon payment that you’d like to avoid. But maybe, you just like lower rates.
Regardless of the reason you may be considering a refinance of your commercial property, here are six factors to take into account and discuss with your lender.
Rates Are Historically Low
The prime rate is the interest rate determined largely by the Federal Reserve, which impacts an institution’s prime rate. This has a large impact on lending rates offered to customers. Many commercial banks have margins below prime to offer to credit-worthy customers. Univest is able to offer competitive fixed-rate options at a variety of term options, depending on your goals. Rather than refinancing your property every few years in unknown market conditions, you are able to take advantage of today’s fixed rate and guarantee yourself a low fixed rate.
Improve Cash Flow
Leveraging a lower interest rate, and possibly a longer amortization, can help your business by improving annual debt service. What could you do with additional cash on a monthly or annual basis?
Costs and Prepayment Fees
Many borrowers want to avoid the additional costs associated with a refinance prior to loan maturity due to the prepayment penalty typically associated with commercial loan payoffs. With rates as low as they are currently, if your loan is reaching maturity in the next 2-4 years, the lower interest rate savings will likely offset the costs. Either you, or your banker, can calculate your break-even on the new financing terms. This calculation can help you see how you can absorb the additional costs and save money throughout the life of the loan, while reducing your monthly principal and interest payment in the process.
Like many borrowers, you may have multiple commercial properties. When you refinance multiple properties into one commercial loan, you have the ability to offset certain risks on some properties with the strengths of other properties in the portfolio. When the risk is lower, the bank will generally view this as more favorable, resulting in more favorable terms including lower fees, lower pricing, and more appropriate amortizations.
Recoup Property Equity – Cash Out
Although a refinance can be used for paying off existing debt, refinancing a commercial property can also be a means to equity disbursement. Cash-out refinancing is a way for real estate investors to recapitalize the equity within a real estate project to utilize it for other needs. But a cash-out refinance isn’t without risk to the investor/developer or the bank. Considering the current market conditions, stability of the property with lease tenure and tenant stabilization, and your own excess cash flow are key factors to consider when deciding to cash out equity. In many cases, the cash-out can be a considerable amount to allow for additional working capital for other income producing projects.
Locking in a Variable Interest Rate
Adjustable, or variable, interest rates are used for a variety of situations. When refinancing into a fixed rate of interest, you can reduce the volatility in your portfolio, and guarantee unpredictable rate fluctuations in the future.
With many banking options in the market, be sure to shop around to find the bank that is able to present an option best suited for your short and long term goals. Now is the time to consider how to make your commercial property work harder for you and Univest is here to help. Get started by contacting us at 877-723-5571.
Univest Bank and Trust Co. is an Equal Housing, Opportunity and SBA Preferred and Lender.