When is the Right Time to Refinance Your Commercial Property?
Contrary to popular belief, refinancing your property can provide multiple benefits. However, whether or not you should refinance depends on the current lending environment and other commercial real estate trends – Property owners should assess their position, identify their goals, and determine if refinancing is right for them.
We understand that this may sound vague, so to help you determine if refinancing is right for you, we have outlined the top four reasons investors are refinancing in today’s market.
Reasons to Refinance Your Property
Here’s how refinancing can help improve your position.
1 – Reduce Your Interest Rate
Commercial properties tend to be long-term investments. As a result, depending on when an investor purchased their commercial real estate asset, their interest rate could be higher than the current market.
Many investors have found that by refinancing, they can save hundreds each month. These savings can then be allocated to a new investment property or renovations on an existing property.
2 – Switch from an Adjustable-Rate to a Fixed-Rate
If you currently have an adjustable-rate commercial property mortgage, you should refinance. This is a no brainer! An adjustable-rate mortgage means that the interest rate on your loan fluctuates over time with the market. On the other hand, a fixed-rate mortgage charges a set percentage of interest that does not fluctuate throughout the loan’s life.
Therefore, if you currently have an adjustable-rate, you may be benefiting from the current market conditions. However, as they shift, your interest rate could increase. By switching to a fixed-rate, you could lock in today’s low rate.
3 – Avoid Balloon Payments
A commercial loan consists of three significant variables that can impact one’s repayment schedule:
- Interest Rate: The rate a bank or lender charges to borrow its money.
- Mortgage Term: The length of time you are committed to a mortgage rate, lender, and conditions set out by the lender.
- Mortgage Amortization: The length of time it takes you to pay off your entire mortgage.
The amortization period is typically longer than the term of the loan. For example, an investor borrowing $1 million may receive a commercial loan for a term of 5 years with an amortization period of 20 years. This means that the investor would make payments for 5 years based on the loan being paid back over 20 years. At the end of the 5 years, the investor would be required to make a balloon payment, which consists of the loan’s remaining balance.
An investor can extend their amortization schedule by refinancing, pushing back the timeline to their balloon payment. In some cases, investors can even extend their timeline, increase their cash flow, and reduce their interest rate.
4 – Cash-Out Refinance
A cash-out refinance allows property owners to pull out equity to improve their position.
Refinancing can provide investors the capital necessary to complete renovations and property improvements. By taking advantage of a cash-out refinance, investors can reposition themselves to increase their cash flow. For example, property renovations may help an investor ask for higher rents or upgrade the property to lower overall maintenance and utility rates.
On the other hand, those who are in a stable position with their current investment property can pull out equity to reinvest. Cash-out refinances provide investors access to capital to reinvest and expand their portfolio.
How to Refinance A Commercial Property
In all cases above, refinancing allows investors to unlock equity in their portfolio, simultaneously allowing them to increase their cash flow and reposition their debt.
For those investors that qualify, refinancing may be their next big strategic move to improve their overall financial position.
If you are interested in refinancing, the steps are simple. Thousands of mortgage brokers are actively working with property owners to help them benefit from the current lending environment. To take advantage and improve your position, we can connect you with a qualified mortgage broker in your local market.