Recent news about the Federal Reserve dropping the Federal interest rate has lots of real estate owners evaluating whether they should refinance.
If you are like many watching interest rates, right now you might be considering refinancing given the most recent interest rate reductions. If you are considering a refinance, you first want to make sure it makes sense given your current goals.
The first thing to know is that just because the Fed lowered Federal interest rates does not necessarily mean mortgage rates are lower. Loans financed under your personal name, your loan go to the secondary market for financing. Secondary market rates are based on the rate of the 30-year Treasury bond.
On the other hand, commercial loans, loans purchased under a company name, are based on the prime rate. Lenders generally keep these loans in-house. Lenders may advertise as Prime +1.2 meaning the rate is advertised as Prime rate plus another 1.2%.
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How to Know if it is the Right Time for You to Refinance
While it is certainly good to be aware of current interest rates, don’t overlook the overall impact of making any adjustments. For this reason, we created a free tool to help you analyze your loans across your portfolio at a high level. While this tool will help you ask the right questions, you need to engage your own CPA, Lender or Tax accountant to give you customized advice for your own specific situation and goals.
The interest rate calculation could vary based on the way your lending institution is calculating the interest rate on your loan. Check out our Day-Count Convention: The Small Print That May be Costing you Thousands blog where we cover the most common loan calculations methods used by lending institutions and the impact each one can have on your bottom line.
Fees could be higher than normal if lenders are experiencing a capacity overload. Also, be sure to understand the other costs such as closing costs, transfer or loan origination fees, or prepayment penalties. You don’t want any savings you were trying to achieve to be zeroed out with additional expenses.
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Common Refinancing Goals
Reducing the interest rate is just one reason to refinance. Here are a few others:
- Refinancing a set of properties and using the other properties as part of the package
- Debt consolidation
- Increase cash flow
- Reduce overall interest paid
- Move to a longer-term loan
- Move from an adjustable-rate late to a fixed-rate loan
- Cash-out on some equity
- And, of course, lowering your interest rate
Is it Time to Have a Conversation with Your Lender Instead?
The other question to ask yourself right now is what sort of tenant base do you have? If you have tenants in the hospitality/retail industry right now, in all likelihood they have been impacted negatively. Across the country, restaurants and bars have been forced to close to the public with take-out options only. Other businesses brick and mortar only stores may struggle as well. The real question is how has your tenant base been impacted by the COVID-19?
Regardless, starting conversations sooner than later with your lender and tenants may help you jointly weather the downturn. Many borrowers are already working with their lenders to temporarily move to interest-only loan payments or other creative solutions. Proactively manage these relationships. Get ahead of the curve.
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