When Should You Refinance Your Commercial Mortgage?

November 15, 2018

While that’s a pretty easy question to answer for residential mortgages, where refinancing is driven almost entirely by interest rates, the reasons for refinancing a commercial mortgage can be more complicated. Like a residential mortgage, low or falling interest rates can be a significant factor in commercial mortgage refinancing, but plenty of other considerations enter into a decision as well:

> Timing. If the loan has an adjustable rate or a fixed rate that will end soon, refinancing can greatly reduce the volatility in your loan portfolio or avoid the potentially large liability of an upcoming balloon payment. 

> Freeing up funds.
One of the best reasons to refinance is to reduce monthly payments or extract equity to reinvest in purchasing the property or improving existing properties.

> Consolidating debt. Combining multiple commercial properties into one new loan can reduce your portfolio’s overall risk by balancing stronger and weaker properties. A larger loan may offer more favorable terms and an overall reduction in fees. 

> Cost of refinancing.
Prepayment penalties can be substantial and closing costs can add up quickly.

> Tax implications. Be sure to consider all the tax angles. For example, equity you remove in a refinancing would be taxed if you convert it to personal income, but not if you invest it back into the business.