Do you own a business? Have you used borrowed money for funding the enterprise? If you're considering refinancing any commercial mortgage that you may have, a number of factors should be considered to ensure that you're making the best decision for your operation. You'll need to sufficiently answer the following questions:
- Will you be able to get extra cash? If yours is like most businesses, you always have a need for extra cash, whether it's for renovating, additional inventory, expansion or some other expense. If you can get extra operating capital from a commercial mortgage refinance, it may be very beneficial to you and your company.
- Will there be limitations on how I use the cash? Make sure you check with your lending institution to find out if there are any restrictions dictating how the funds must be spent. Some lending institutions set limitations, whereas others may adopt the opinion that it's your business and your money (though you, of course, must pay it back) to be spent however you see fit.
- Will my interest rate and/or payment be lower with a refinance? Many people refinance their commercial mortgage loan with the sole intention of reducing their monthly payment or taking advantage of lower interest rates. If you can do this with a refinance, you'll likely be making a wise choice. If you want lower payments, you can request the loan be extended for a longer term than the original loan.
- Will there be a balloon payment? Although there may be a handful of people that that don't mind balloon payments, most business owners prefer to have their commercial loan amortized over a certain period without having to worry about refinancing every 36 months – or whenever the balloon payment comes due. Balloon mortgages can be beneficial if market rates are high or your credit bad when you first sign the agreement, but they can be quite dangerous and should only be used with the utmost care.
- Are there any options available for commercial refinancing if I (and/or the business) have bad credit? You'll find that most banks and lending institutions today have options for bad credit borrowers. Your interest rate may be a bit higher than normal, but most lenders will work with individuals with bad credit as long as good collateral is available.
- What will my out-of-pocket expenses be? You can expect to pay closing expenses that may include an appraisal, title insurance (if property is involved), points, loan documentation fees and other costs. If you don't take out extra cash, your outlay may be minimal, but when cash is taken back it's generally treated as a new loan rather than a refinance.
- Will there be a requirement for monthly or annual reporting? Some banks do require this type of reporting, and if you fail to comply you'll be in default of your loan agreement.
- What are the 'Loan-to-Value' Limits? Depending on the lender and program, the loan-to-value limits may be as low as 50% or as high as 97%.
- What will the borrowing limit be? The borrowing limits for commercial mortgage refinancing are usually lower than those of outright commercial purchases, typically in the $1- to $1.5 million range.