Is it worth to refinance my commercial property even if I have a prepayment penalty?
 


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
Index         3 Month LIBOR     3 Month LIBOR
Rate           1.290%               5.235%
Margin        4.000%               4.000%
Loan Rate   5.290%               9.235%
 
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" monthly payment.
 
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!