While residential mortgage refinancing receives far more attention, businesses often have mortgages and reap similar, if not greater, benefits for refinancing their mortgage. Here are five reasons business owners should consider commercial mortgage refinancing compared to the alternatives.
- Reduce Your Monthly Mortgage Payment
Commercial mortgage rates decline along with residential mortgage rates. There is a good chance mortgage rates in both cases are lower now than they were when you took out your mortgage. Commercial mortgage refinancing could save you hundreds or thousands of dollars a month on your mortgage payment. The cost of refinancing pays for itself in two to four years, depending on the associated fees and the difference between the interest rate you’re paying relative to current interest rates. If your business is strapped for cash, refinancing the mortgage to a longer term will also reduce your monthly mortgage payment and reduce how much you have to earn to stay open.
- Access to Cash without High Interest Rates
One reason to consider commercial mortgage refinancing is to use cash out refi in order to access cash withdrawn from your real estate’s equity and paid back at a lower interest rate or monthly payment than you’d receive from any other type of loan. Commercial mortgage refinancing may involve a larger, single mortgage or a second mortgage against the property. This is preferable to raising capital by taking out a second mortgage. When you take out a second mortgage against the property, the interest rate is typically higher than a single consolidated mortgage.
A side benefit of using cash out refinance to raise capital for your business is that it doesn’t provide the same temptation to run up debt that a line of credit does. And mortgage payments for the new loan are stable, compared to the variable payments that come with paying off a percentage of an ever changing line of credit. Consult with a financial expert before assuming the higher mortgage interest payment is tax deductible, though mortgage or rent is usually deductible as a business expense.
- Debt Consolidation
A commercial mortgage refinancing that adds unsecured debt and high interest debt to the commercial mortgage lets you simplify the debt payments into a single monthly payment with a lower average interest rate. And if your business does go under, selling off the building for its market value will clear these debts as soon as the mortgage is paid off as part of the real estate transaction.
- Accelerated Payoff
One thing often overlooked in discussions about refinancing a mortgage is the value of shortening the loan term. Refinancing a loan from a 30 year note to a 15 year term results in moderately higher payments but you speed up the day when you won’t have mortgage payments at all. And when you no longer have to pay those payments, you have more money left over to invest in the business.
- Better Loan Terms
Commercial mortgage refinancing gives you the opportunity to secure better terms. While lower interest rates and a shorter loan term were already discussed, you could refinance your mortgage to remove prepayment penalties, move the loan to a lender that gives you a break on interest because payments are automatically deducted from a checking account or improved banking services.
Another common reason for businesses to refinance their commercial mortgage is to switch to a fixed mortgage. If for some reason, going for a variable or interest only was a better deal at the time you got your first mortgage and the mortgage rates at the time of refinancing are at rock bottom, then it would be a great decision to switch to a fixed mortgage.
In many cases, business owners decide to go for an adjustable rate loan when they’re just starting to cut on initial costs. However, adjustable rate loans can be tricky as you may never know what your exact overhead costs will be.
As you can see, there are plenty of reasons why refinancing a mortgage might be a great idea for business owners. Refinancing your commercial mortgage may let you reduce your monthly mortgage payment by securing a lower interest rate. Refinancing presents the opportunity to arrange better loan terms. If you refinance the loan to a shorter term, you’ll eliminate the mortgage expense altogether. Cash out refinancing via a new mortgage is cheaper than any other way to raise capital, while consolidating debts into a new single mortgage offers the lowest overall interest rates and the benefit of simplicity when it comes time to pay bills.
