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What Is Commercial Refinance?
Commercial property owners often ask when the best time is to venture into a commercial refinance situation.
Many different factors come into play in the process such as market rates, any prepayment penalties, the existing loan terms and the goals of the borrower at all things that must be considered.
A traditional system used for commercial refinance is a method known as Discounted Cash Flow. This method compares the proposed loan with the existing loan on the basis of a Net Present Value.
Commercial property owners want to know what the closing costs of commercial refinance will be. They want to understand how the refinance will potentially affect their cash flow every month and how many months will pass before they can pay back the closing costs to the owners.
They will be informed about what the amortization schedule will be compared to their already existing loan.
The primary reason borrowers seek a commercial refinance is to increase their cash flow.
There are only two ways to do this, by a reduction of the interest rate in addition to or instead of increasing the length of the principal pay down will be. Sometimes, however, especially if the borrower is looking at a ballooning loan, the situation may not improve.
It is possible, instead, that their monthly payment will rise according to changes in the market rate or when the loan programs change. At times, the borrowers earnings will not be as strong as they were when they got their current loan, and lenders will refuse to offer them the same rates or programs that they qualified for previously.
A major concern for borrowers centers on closing costs. An appraisal can range from $2-5K, processing another $1K and $5K for environmental reports, for example, the soaring costs of the titles, processing and so forth, it is no wonder borrowers are concerned.
They are dealing with huge costs associated with the commercial refinance.
In most cases the borrower is able to roll the majority of those associated costs into the loan amount. However, the property owner should be prepared to pay the appraisal out of pocket, as well as the environmental report fees.
Additionally, the funding bank may require the borrower to pay the processing fee upfront, too.
If the borrower manages to talk the lender into lower monthly payments, he or she will want to do a cash flow analysis to find out how long it will take for their savings to cover the closing costs.
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