Why perform a commercial mortgage refinance? Out of necessity of course. Most borrowers want to pull equity out of their property or face a ballooning loan that forces them to investigate options, spend thousands on third party reports and put in many hours into the process.
Options
As borrowers begin the process of researching they are often pleasantly surprised by the additional loan programs that have become available in the last 5 years. 30 year fixed loan programs, no cost (no 3rd party report costs) commercial refinance programs, non SBA 90% financing, etc replace the traditional 5 year balloon/20 year amortizations programs that have been the main stream for years.
Commercial cash out refinances are a common option that many borrowers elect. Whether the borrower wants to simply 'pay themselves' back for the third party fees or max out the allowable cash out proceeds by the lender, the choice is often left to the borrower. Depending on the amortization period and existing rate the borrower can often pull cash out and still have a similar monthly payment.
By increasing the loan amortization schedule to 30 years, from the more typical 20 years, the borrower often enjoys a cash flow increase of 20% or more. For highly leverage investment properties or cash flow tight businesses this can have a tremendous impact on their bottom line. For example, on a $1,000,000 loan, with a 7% interest rate, the difference in payment on a 20 year vs. a 30 year schedule would be $13,191 per year.
Lowering one's interest rate is an obvious desire and benefit of refinancing a commercial mortgage. This can result in saving hundreds of thousands of dollars over the life of a loan. However, when a borrower faces a ballooning loan or adjusting rate this is not always the case. The overall market dictates most of the borrower's rate options and it's up to the borrower to find the best loan program for them.
Third Party Reports- Costs
The costs to perform a commercial mortgage refinance are high. Appraisal's normally run between $2,000 - $5,000; title is often between $800 - $2,000; environmental reports are around $2,000 (phase one); lender processing fees cost app. $1,000.
It's to the borrowers benefit to do a simple break even analysis to compare these costs to multiple lenders and to their existing bank if they are offering to reset the loan. Often the borrower finds that the third party costs are lower with their existing bank, but the overall costs are less with another capital source than is competing hard to win the borrower over.
Time Line
First of all, the process to close a commercial mortgage refinance is universally underestimated by banks, lenders and brokers. Your typical loan takes 75 - 90 days to close, not 45 days. In addition, there's a common communication error that frustrates all involved. For industry insiders they argue (correctly) that the loan process does not begin until a commitment letter is signed and fees for third party reports are paid. From the borrowers perspective the process normally begins when they make a mental decision to go with a particular bank - whether or not the bank has received all the information they need to make a first round lending decision. This communication error results in a further time lag that often creates frustration for the borrower and everyone else involved as tension can become high.
Waiting on the completion of the third party reports (appraisal, environmental, engineering, title) take a large portion of the time to underwrite and close a commercial mortgage refinance. It is not uncommon for an appraisal to take 8 weeks to complete. In addition, many traditional funding sources will wait for one report to be completed before they will order the next; rather than doing all of the 3rd party reports simultaneously.
Borrowers can also add a tremendous amount of time to the process as well. Waiting on the completion of missing documentation (example, uncompleted tax returns) is a common issue. Furthermore, if the borrower becomes annoyed with seemingly unimportant requested documentation and 'puts off' completing, the results is just additional time added onto the process as lenders rarely back down from requested information.
