Refinancing your commercial property means taking out another loan to pay off your existing mortgage.
4 Reasons Why Businesses Engage In Commercial Property Refinancing
Some changes may compel you to refinance your property; whether it’s a residential or commercial asset. A better refinancing offer may have cropped up, and taking out another loan may significantly reduce your current payment rates.
While you may be able to reduce your rates, the fact remains that you still owe a lender some money, and you can still lose your collateral if you default in your payments.
Below is some information on the pros and cons of commercial property refinancing to help you decide whether it makes sense to get one.
If you need to know more about commercial property refinancing, here’s an article that talks about it in greater depth.
If you’re ready to proceed, learn more about the most common reasons why businesses have their property refinanced.
1. Availment Of Low-Interest Rates
Not all loans are the same. Residential mortgages often last for 25 years, while commercial loans last for 10 years maximum. Besides the length of repayment, commercial loans are imposed with different interest rates.
Most, however, are stuck with adjustable interest rates, determined based on many economic and market conditions. This means your repayment rates and fees are fluctuating. Thus, when a lending institution comes up with a great business loan or refinancing offer, businesses are ready to pounce on the deal.
2. Cashing Out To Fund Business Improvements
A cash-out refinancing loan allows enterprises to borrow an amount higher than what’s owed on the property. In such cases, a lender provides the differential amount from the amount borrowed minus the remaining balance to be paid off, in cash.
A business that needs more funds can avail of this refinancing method. If you’re a rental property owner, use the extra cash for repairs. Once the makeover is done, ask for higher rental fees.
For more information, head to this home loan refinancing guide, which explains additional benefits and options if you’re looking to switch lenders
3. Consolidating Debts
Some businesses have multiple loans, and refinancing all of these mortgages to consolidate them may be a good idea to balance the debt portfolios. Often, lumping all mortgages together could result in lower interest and repayment rates.
A balloon payment describes a one-time lump-sum payment for the remaining loan balance. Lenders typically charge borrowers with this at the end of the loan period. Some business owners try to avoid paying for this hefty amount by taking out another loan.
The Downsides Of Refinancing Commercial Property
1. You May Have To Pay Higher Upfront Costs
Having your commercial property refinanced may save you costs in the long run. However, you’d likely be charged with closing costs for your existing loan and refinancing costs for your new mortgage. Some small business administration (SBA) loans, for instance, impose prepayment penalties for some loans that are paid off earlier than the maturity period.
Before refinancing, make sure to check all the upfront costs and compare them with the costs you’ll supposedly save.
2. Your Monthly Amortization May Increase
Businesses that choose to refinance their commercial properties may pay reduced interest rates, but it doesn’t necessarily mean that they’re lowering their monthly amortizations, too.
Lenders often charge lower interest rates for longer loan terms, but you may still end up paying more as compared to borrowing the same amount under shorter repayment terms.
3. You’d Have to Start From Scratch
Applying for a refinancing loan may not be worth all the effort. This type of mortgage is more complex than personal loans, and it has stringent approval rules. Applying for one, you’d have to fill up forms, provide a stack of documents, and wait to be appraised and approved (or rejected).
4. Some Commercial Loans Can’t Be Refinanced
Despite the attractive rates, an SBS 504 loan can’t be refinanced. This type of loan is typically intended for commercial properties occupied by the owner, except for apartment buildings.
This means an owner is stuck with the loan for several years, without the possibility of refinancing. So, check with your lender first before thinking about refinancing options.
Major Considerations For Refinancing Commercial Properties
- The Timing – If the loan rates have a cut-off period, or if your balloon payment is coming up on two months or so, it’s best to prepare your documents as early as possible.
- Funds – If you’re in need of additional funds as soon as possible, but can’t think of any other source for commercial property repairs, refinancing may be a viable option. Similarly, refinancing to consolidate all your debts could free up some funds for business expenses.
- Upfront Costs And Repayment Fees – The costs of refinancing, including prepayment fees and closing costs, may burden the borrower, making the effort of applying for refinancing simply not worth it.
The Bottom Line
Before applying for a refinancing loan, study all your options and make sure the benefits outweigh the risks. For this, you need to refer to your business goals and financial objectives, as well as capacities. You may also need to speak to a financial advisor to help you choose the best options based on the abovementioned elements.
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