In a market of rising interest rates, this is a question that
arises while reviewing my clients financial strategies and investment goals. I think that the issue comes down to the same
main questions that we should ask ourselves while entering into the real estate transaction:
◊ What is the purpose
for the subject property?
◊ Looking to obtain monthly cash flow or preparing for future equity/retirement?
Holding the property for long term or short term?
Once we have established the main purpose for the subject
property plus the consideration on the transaction we can move forward to evaluate whether or not the loan currently on the
property fits the purpose. For example, in a raising interest rates market having a variable rate loan on a long term hold
property can completely erase any future income from the property due to the increased and fluctuating monthly payment.
Let's say 3 years ago you purchased a property and obtained a loan in the amount of $2,150,000 at a variable rate utilizing
3 Month LIBOR (1.290% average during April 03) plus a margin of 4% resulting in an initial interest rate of 5.29% - Not Bad!
The note started at such a great rate that also had a 5 year prepay penalty. Today, that same note that seemed so favorable
3 years ago has an increased rate of 9.2335%.
May 2003 May 2006
3 Month LIBOR 3 Month LIBOR
Loan Rate 5.290%
What do you think that did to this customer's monthly payment? Of course,
it increased! Is that increased monthly payment going towards the equity on the property? No. Is that increased monthly payment
allowing for a better cash flow? No. Are you wondering what to do at this point? Global Funding Partners can help YOU! We
can do an analysis of your current loans in connection with the length of time that you intend to hold that property and the
expected financial outcome. More times that not, if you intend to hold a property long term, having a variable rate loan is
not the right solution for you.
But, what about the prepay? You are probably asking yourself. Well, frequently
the amount of savings that you will have just on the first years of your new loan will offset the amount you had to prepay
on the previous loan - giving you a much larger term on savings and, of course, the piece of mind of having a "controlled"
For a free consultation and analysis on your current properties please contact us immediately.
You'll be surprised with the new outcome that may be available to you!