Perhaps a better question is HOW to refinance.
This week the Fed (FOMC) stayed the course as advertised, raising their Fed Funds rate another 25 bps, their 8th ¼ point increase since late 2015. This takes Fed Funds to 2.00-2.25% range, and Prime to 5.25%. In their public announcement following the Wednesday meeting they reiterated (couched in language as only the Fed can do … a lexicon termed “Fed Speak”) that a December ¼ point is anticipated, and 3 more bumps to follow in 2019.
In discussing the current increase, they implied that this latest hike will bring interest rates to what they term as “neutral”, meaning at this level interest rates as not so low as to continue to simulate the recovering economy and perhaps spark unwanted inflation, nor so high as to chock off the expansion … somewhat of a “Goldilocks” rate, i.e., just right.
This being the case, what do you do if you have a loan requiring payoff?
Retiring loans offer a few alternatives: pay off with cash, sell the asset and use the proceeds to pay off the loan, or refinance.
Assuming the first 2 alternatives are not either feasible or desirable, we’re left with how to finance, i.e., what kind of loan is best … fixed or variable rate.
If the current rate is neutral today, you can bet it won’t be tomorrow. Changes in the economic and financial environment operating over time, including the Feds continued propensity to maneuver rates and other Fed tools, e.g., balance sheet normalization, will result in the current rate increasing or decreasing – but which will it be? We don’t know of course, but here’s a thought on the matter.
The current horizon is somewhat visible for a year or 2, barring a few black swan events: the outcome of the Nov. election, Trumps continuing trade practices, geo-political sanctions, unforeseen actions by any of mover-n-shaker nations of the world (Iran, N. Korea, Russia, etc.), central bank activities & policies (not just the U.S., but other country’s central banks – affecting specific country interest rates, and in turn currency exchange rates). We could go on, but you get the point. Pricing systemic risk into your refinancing decision is an exercise in futility, and usually results in no overt action taken – you default to the status quo.
Would it be nice if you could get a fixed rate loan for an interim shorter period of a longer term loan, but the interest rate over the total term would tend to track interest rates at the time … termed “mark to the market”? Well, you can. You perhaps recognize this as an adjustable rate loan that resets during the entire term … perhaps a 15 yr. term fixed for 5 years and adjustable in the 5th and 10th year. As opposed to a fixed 5 yr. loan, an adjustable loan doesn’t require refinancing at the end of the 5 year term. These might have a pre-payment penalty schedule during the first 5 years, but none after that. This loan might effectively looked at as a 5 year term loan with 2 / 5-year options to extend. The amortization period may vary also. We’ve seen them out as far as 25 years, but 20 years is offered more often.
This might seem intriguing, but where do you find such a loan? You might shop several of the visible banks around for their offering of this type of structure, and depending on your property’s asset class, get a couple offers. Bear in mind the offers you get are from the available line of “products” that the bank has available that day. The bank down the street may offer you a variation on the theme. How do you sort them out, and more importantly how do you negotiate the best loan, modified (negotiated) for your specific property and situation?
Hum-m-m-m-m-m-m … Well, you know where this leads. Call us for one-stop shopping, and counseling for you specific situation. As a broker we work for you, not the bank!
For specific counseling, give us a call at Counsel Mortgage.
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Michael Green is a Commercial Loan Originator for the Counsel Mortgage Group®, LLC.
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