Investors and business owners who own commercial real estate face unique challenges when their mortgage comes due. Since commercial mortgage terms are typically 5 to 7 years in length, borrowers must continually execute refinance strategies that put them in a position to meet their overarching investment goals.
The stakes are especially high for property owners whose mortgage includes a balloon payment at the end of the loan term. If those borrowers are unable to successfully refinance their commercial mortgage before the final payment comes due, they will be forced to pay an exceedingly large amount – something many borrowers simply cannot afford.
Therefore, it is critical that investors and business owners take a proactive approach and create a refinance strategy that positions them for long-term success. They can start by asking themselves the following three questions.
- Am I eligible for a more attractive loan?
Commercial real estate owners who secure a loan and then complete cosmetic improvements, re-tenant the property, or generally increase monthly cash-flow are often eligible for better terms when it comes time to refinance.
Others find themselves in a beneficial position simply because interest rates have dropped since they took out their last loan.
Regardless of the reason why, borrowers who believe they can secure a more attractive loan when they refinance should take the necessary time to study the current lending environment. After all, lenders that may have issued a denial 5 years ago could be far more willing to do business based on the current state of the property or borrower.
Of course, commercial property owners must remember that the most attractive loan is not always the one with the lowest interest rate. In fact, many commercial borrowers are more than willing to pay a higher monthly payment in exchange for a simplified application process with less documentation required, an underwriting model centered on streamlined income verification, or an abbreviated closing schedule.
Instead of hunting for the lowest rate, borrowers looking to refinance their commercial property should work to identify the solution that meets the greatest number of their needs.
- How much time do I have?
Commercial real estate owners understandably have a number of pressing concerns beyond the mortgage on their property. Investors may have a number of other assets to manage and owner-users must devote the lion’s share of their day to successfully running their business.
But those who neglect their commercial mortgage severely limit the options they have as the term comes to an end. That is because it takes a significant amount of time to survey the lending landscape and identify options that best meet a borrower’s current set of needs.
If their commercial mortgage is not fully amortizing – meaning a balloon payment will be due at the conclusion of the term – then a borrower should begin looking for a refinance solution about a year ahead of their final loan payment. That way they can avoid having to settle for a quick solution that includes unsatisfactory rates and terms.
- Should I take cash out of my existing mortgage?
A cash-out refinance is a popular tactic for borrowers looking to access a portion of the equity tied up in their commercial property. In this case, the borrower converts equity into cash by taking out a larger loan than their previous mortgage. The original loan amount must be repaid to the lender, while the remainder is paid to the borrower in cash.
This can be a smart option for business owners who want to make property or business improvements, investors looking to make their next real estate purchase, or any borrower who needs to pay off existing debt.
Borrowers interested in executing a cash-out refinance strategy should keep in mind that lenders can restrict the amount of cash-out a borrower can access and the ways in which it can be spent. When weighing one’s options, it is also important to consider the closing costs and any additional insurance required for the new loan.
Still, investors and business owners who need to refinance their mortgage should ask themselves whether or not they also need access to the equity they have built into their commercial property. A cash-out refinance could solve both issues simultaneously.
Property owners who fail to ask themselves these important questions when refinancing their commercial mortgage are more likely to end up with a new loan that solves few, if any, of their most pressing financial needs.
However, those who see the opportunities to improve their financial situation put themselves in a much better position to do just that when they refinance.
Leslie Smith is Managing Director of Commercial Direct. She led the launch of Silver Hill Funding in 2016, and is building on that experience to spearhead the launch of the consumer-facing direct lender, Commercial Direct.
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