Commercial mortgage refinance is a process by which the interest rate on a commercial loan is reduced.
What does it mean to refinance commercial property?
A borrower can take out a new loan at a lower interest rate and use the money from the old loan to pay off the balance as part of the refinancing process. The lender will then sell or assign its rights to collect payments on that debt to another entity, such as an investment bank. Commercial mortgage rates are typically higher than those for residential mortgages, but there are many reasons why businesses may want to refinance their commercial loans, including:
- Lowering overhead costs associated with high-interest commercial loan
- Improving cash flow by lowering monthly payments
- Reducing borrowing costs in general
- Extending the term of the loan to reduce monthly payments, and
- Reducing risk and interest rate volatility.
Pros and Cons of a Commercial Property Refinance
Commercial mortgage refinancing can be a great way to save money. But it’s not always the right choice for every business. To help you decide if this is right for you, here are some of the pros and cons of commercial refinance loans.
- You may have lower monthly payments with a commercial loan than with your current one, which means more cash on hand for other things.
- Commercial mortgages typically offer a lower rate refinance than residential mortgages because they don’t come with high risk factors.
- The interest rate is often negotiable, which can make it easier to get an attractive rate even if your business credit score isn’t perfect. Refinancing at a lower rate is a great way to save money over time.
- It’s more difficult to qualify for commercial banks because banks usually require a higher credit score for a commercial loan. If your business has been operating under a different name, this can be tricky to prove.
- The time it takes to complete the process of applying and qualifying can be long.
- It’s also important to pay close attention to the “points” that accompany the loan as well as what you’ll owe in closing costs
Who should consider refinancing commercial real estate?
Commercial refinance lenders may be more likely to provide a commercial mortgage than a homeowner, and they’re often easier to qualify for. With Commercial mortgages you can generally lower your interest rates and monthly costs by about 15%. These loans are also cheaper to the lenders themselves since the risks of default are much less. Scalability is another aspect that many small businesses dream of. Most commercial loans offer terms as long as 30 years so if you start slowly but have big plans, this might help you out.
Commercial property refinance loan types
The following are four types of commercial property refinance loans. This is not an exclusive list, and other options include CRE refinance options for small business loans such as an SBA 504 refinance loan not found here. Other options include secured business loans.
Traditional Commercial Property Refinance
This type of mortgage involves taking out a new loan with a different interest rate that will be used to pay off the balance on the old loan.
Cash Out Refinance
With this type of loan, the borrower will need to have equity in their property in order to take out a new loan, so they can use it for cash-out or build-out. The borrower will need to have enough equity in order to cover the down payment and closing costs for this kind of home mortgage refinancing.
Interest Only Mortgage
The borrower only pays the interest on their loan, which allows them to invest the difference. This can help them pay off their existing mortgage faster or build up some equity in the property.
With this kind of loan, part is interest-only and part is paid on a fixed schedule. The borrower will need to have enough income to cover the full payment if they choose to make the interest-only payment.