You’ve heard about the historically low interest rates for residential mortgages and how homeowners have taken advantage of them. But did you know that rates are also low for commercial real estate and that you can save money for your business through a commercial mortgage refinance?
Perhaps your current mortgage has a high or variable interest rate, or you have commercial real estate equity that you’d like to use to grow your business. If so, then refinancing could be a great option for you.
In this overview, you’ll learn the pros and cons of a commercial mortgage refinance, as well as next steps to take before interest rates rise again.
Commercial mortgage refinance: Pros and cons
Interest rates for commercial mortgages are low now, but due to anticipated federal economic-policy shifts, these interest rates will likely increase in the months to come. If you think your loan could be a candidate for a refinance, then it’s important to explore your opportunities with your lender and your accountant right away to figure out the best path for your business. There are several options available when you refinance, including these popular ways to benefit from lower interest rates:
A refinance to lower your mortgage’s interest rate
In this scenario, the balance of the mortgage owed is refinanced over the remaining time period that’s currently on your loan.
For example, let’s say that you still owe $230,000 on a $400,000 loan and your current mortgage has five years left on it. You can refinance the $230,000 at a lower interest rate but keep your payoff date the same (or roughly the same, depending on what you negotiate with your lender).
Pro: In this case, you benefit from a lower interest rate without adding years to your loan term. For many commercial mortgages, this change alone can result in a difference of hundreds or even thousands of dollars each month, if your current interest rate is high and/or variable over the life of the loan.
Con: There are fees associated with a commercial mortgage refinance, so it’s important to ensure that the difference in your current interest rate and a refinance rate is substantial enough to make it worthwhile. You may be able to negotiate with your lender to see which fees, if any, could be waived or reduced.
A lower interest rate and an extension of your repayment term
If you need even more financial breathing room in these uncertain times, you can refinance to gain both the lower interest rate and a longer repayment term to lower monthly payments.
For example, if you had five years left on a 10-year mortgage, you could get a new loan at the lower interest rate, calculated over 10 years again, to lower the monthly payment.
Pro: You can substantially lower your monthly payment, which frees up cash each month that you can reinvest in your business.
Con: Although your monthly payment could be substantially lower in this scenario, it’s important to know that you’d add several years to your mortgage, which means that you could ultimately end up paying more over the long run.
A cash-out refinance
In this scenario, when you refinance your commercial mortgage, you can also take out some of the equity that you’ve accumulated, gaining both cash-in-hand and a lower interest rate.
Pro: You can use the cash to reinvest in your business and/or bolster cash reserves.
Con: If you don’t use the cash-out wisely, you could end up with both less equity in your commercial real estate and more debt overall.
Gain additional benefits when you use an SBA 504 loan for commercial mortgage refinances
Small businesses that qualify for the SBA 504 for a commercial mortgage refinance enjoy several additional benefits that include, but aren’t limited to the following:
- Your loan can be amortized over 25 years, instead of the typical 10 years, which means significantly lower monthly payments.
- SBA 504s offer fixed rates for the full life of the loan – up to 25 years – versus the typical five-year lock for most conventional commercial mortgages.
- You can retire some short-term operating debt by paying down accounts payable or lines of credit with the equity you’ve accumulated through your commercial real estate.
- A cash-out could also be used to fund anticipated operating expenses for up to the next 18 months, enabling your business to build a cash reserve, save for future investments, invest in growth and more.
Ask your lender these key questions
To help you decide if a refinance is the smart option for you, ask your lender:
- For estimated closing costs if you were to refinance, including which of those may be negotiable or could be waived altogether.
- If your existing mortgage is subject to prepayment penalties and whether those can be reduced or waived.
- How long the current rate is locked in, as well as the complete terms if you refinance.
Pursuit can help
If you think a commercial mortgage refinance could be the right move for your business, we encourage you to talk to your accountant, your bank representative, and to Pursuit. Every day, we help entrepreneurs like you to obtain funding that boosts your business’s bottom line and supports its long-term success. Contact us today to see what kinds of refinance options may be available for your commercial property and any other business needs, too.
