Commercial Refinance

There are a number of different factors that should be taken into consideration prior to the commercial refinance of a property.  The buyer should work with an accountant to determine how the refinance will affect the monthly cash flow.  The amount of the mortgage itself is not the only amount that will have to be paid out.  The closing costs should also be considered.  The buyer should also think about how much of those costs would need to be paid out of pocket.

Any commercial refinance deal will have specific terms and conditions.  It is important that in the case of an increase in cash flow, the buyer have a realistic view of exactly how long it should take for the amount saved to be enough to repay the owner’s closing costs.   The amortization schedule should also be considered, as the buyer should be informed bout the principal pay down would be in comparison to the existing loan.

The buyer, who is considering a commercial refinance situation, does so to improve the cash flow of a given business. There are a couple of different ways to achieve this objective.  The first is accomplished by reducing the interest rate of the existing loan.  The alternative is to increase the length of its amortization schedule.  Most buyers are already aware of the benefits of an interest rate reduction.  However, some fail to realize the savings inherent in the increase of the amortization schedule.  Spreading out a loan for an extra ten years has the potential to reduce the buyer’s monthly payment by as much as 20 percent.

Unfortunately, borrowers who took out a ballooning loan originally, often find that a commercial refinance will not necessarily improve their situation.  As market rates fluctuate, their monthly payment may go up.  Additionally, is it common for the borrower’s financial records will not be as strong as they were when the original loan was procured and, as a result, they will not be offered the same rates and program they qualified for previously.

During the course of a commercial refinance situation, borrowers may express concerns about closing costs.  These are valid concerns.  Closing costs include the appraisals, which range from $2-5,000, the title, which can run somewhere in the neighborhood of $1-2,000, the environmental reports and processing that can range in cost from $1,000 to around $2.000 and bank fees, which generally cost an additional 1 percent.  The borrower can usually include most of these costs into the loan amount with the commercial refinance options available.  However, he or she should be ready to pay for the environmental report and appraisal out of pocket.  The funding bank sometimes requires the fee for processing the loan to be paid up front as well.

When there is a reduction in monthly payments, the borrower will often perform a cash flow analysis to determine the length of time the money saved in the commercial refinance will take to repay their closing costs.  Commercial refinance can help reduce monthly costs considerably, however.