Better to do a Refi or a LOC?

Question

Hi,

This question just came up.  On a building we have with lots of Equity (balance mortgage is $56k)

I am looking to free up some cash ($250-300k) for a future 2016 purchase, but wanting to get all approved now.  Should I follow thru with the bank Refi & just "bank" the $ until next year OR get a LOC for about the same amount and avoid some closing costs & carrying charges until I make the purchase?  This way the existing mortgage will continue to go down.

Pros/Cons, other than the obvious Rates may continue rising.  Is LOC interest rates deductible?

Thanks,

Joseph Q

Franklin Romine · Answer

@Joseph Quarto

If you going to use the capital for a purchase I would go the refi route.  Lock up the loan in good terms.

Debt is a narcotic.  Accumulate lots of good debt secured by income producing assets and we have a very nice problem if managed properly.

Frank

Shane H. · Answer

@Joseph Quarto

I'm of the school of thought to set up the LOC.  You might be able to pull more cash out if you refi, however I just don't see the point in paying all the extra closing costs and interest on the money when you are uncertain when it will be put to use.

Maybe others can frame an argument in support of refi, my mind is open, however I'm not on the bandwagon.  Interest rates may or may not go up, however in most commercial deals you are not going to get long term fixed rates per my understanding, so I feel the argument framed from that perspective carries minimal weight.

I just went the LOC route on single family property myself for the reason I outlined above.

Shane H. · Answer

Do the loans you quoted above have a balloon payment due at the end of the 7 years or 10 yr terms?  Or does the rate simply start to adjust every year, or possibly adjust year 7 or 10 in your example then lock for another term of "X" # of years then adjust again?

The way I was able to get my LOC structured was:   (using easy math)

Property (residential multi family) appraised $200k  with a present loan of $75k locked in on a 15 yr term at 3.5%

Bank agrees to refi 75k - 20 year amort, rate locked for 5 years, after 5 years rate will adjust per their formula, rate increase capped at 2% per adjustment -- rate then locked another 5 years...year 10 rate would adjust yearly from then on.  I believe there is a rate ceiling of 10% or 12% built in.

LOC terms -- bank agrees to supply LOC with a max LTV of 70% -- so presently ($200k * 70% = 140k-75k [mortgage amt]) = $65k loc -- it will go up as the mortgage is paid down.

Bank agrees to do this since they are in 1st position when I complete the refi.

I'd assume you could structure something similar on the commercial side.  I guess what is best for you depends on what your goals are.  If it's to reinvest the money I personally think LOC is a safer bet that will cost less if you find a bank willing to provide fair terms.  If you want the cash for personal reasons, help fund other areas of your life, pay bills etc, then obviously refi/cash out might be the best bet.  I really struggle paying interest on money sitting in the bank unless you have plans to deploy that capital immediately.  LOC - obviously if the balance is $0 - no interest is accrued....you might have a yearly maintenance fee of some sort, however this would be a minimal expense IMO.

I think it would require some phone/face time to find a bank willing to do such a deal on a commercial property, however I'm certain one is out there.  I'm sure others could chime in if they've done such a similar deal.  (Disclaimer - I understand commercial lending is different than residential, however having done this with a multi family property which is far harder to get this done on than SFH, I'm positive it could be done with a commercial property if there is considerable equity present).

Is your bank willing to give you a LOC as an option or structure a loan similar to what I outlined above?

Joseph Quarto · Answer

What I am looking at ReFi wise right now is;

25 year amort. 7 year - 4.55% OR a 10 year 4.95%

Under $250k

Closing costs about $1,500-1,800 - NO origination fees. No appraisal.

Over $250k - same Except about $1200-1,500 appraisal, which they would pay half of.

Seems like a pretty good deal.  Just curious about the LOC as compared to this.

Joel Owens · Answer

Most long term commercial loans are due in 10 years. Local banks generally 3 to 5 and some even go 7 now.

Pluses and minuses to everything with loans.

A lot will depend on the deal size. The medium size properties with loans over 2 million tend to attract more lenders and options. Over 5 million loan really opens it up. Sub 2 million really local banks and credit unions. I have seen multifamily go down to 1 million but other commercial 2 million minimum on the loan.

Better to do a Refi or a LOC?

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