Shall I refinance with this commercial loan?

Question

I have 8 properties, the mortgages are all in our personal names, the term are around 5.5% for 30 years. I got in touch with a local small bank which is willing to do a portfolio loan for 4.85% over 20 years, but it has 7 year balloon payment. I am fine with the term and fees but I am not sure about the ballon part, which forces us to refinance or sell off the portfolio in 7 years. What do you think?

Doug Smith · Answer

Hi @Johnny Situ. An amortization of 20 years with a balloon of 7 years is not bad for a retail bank. Banks that "portfolio", meaning hold onto their loans, are going to be sensitive to interest rate risk, so most banks prefer to keep their terms (the 7 year balloon) at 5 years or less even when they are willing to amortize (the length of time the payments are calculated for...in this case the 20 years) over a longer period of time. You can sometimes find longer terms with institution investors for loans on properties that provide rental income streams like office buildings, retail centers, and multi-family buildings (banks refer to this lending as CRE), but those institutional investors usually want larger loan amounts, usually in excess of $2 million. You might be able to get them to lengthen the term if you shorten the amortization, which will allow them to recoup their investment more quickly, but keep in mind that banks usually tie the rate to a corresponding length of a particular index, so your 7 year term might be tied to the 7-year Treasury. If you lengthen the term, the rate is likely to go up a bit as the index length that it is tied to will also match the term. One thing that I would recommend is requesting a "partial release clause" in the paperwork. If you every decide to sell a building, you will want to be able to pay down the loan a certain amount in order for the bank to release that particular collateral. You don't want to get stuck. I spent 25 years as a commercial banker before helming the loan funds that I manage now, so I can say that the deal they are offering actually makes sense. I wish you very well and I hope the deal works out for you.

Brandon Hicks · Answer

@Johnny Situ

Keep shopping. They’re are plenty of small banks that will do a 20 year loan...no balloon...but it’ll likely be a 5 year ARM. I’d think you can beat that rate a bit as well right now with solid credit and ample equity.

Mark Allen · Answer

IF it were a 3-year term, I'd say run due to risk of recession after a 10 year run - 7 years isn't bad. Some good feedback here. Keep exploring other options with local banks, look at variable options, or look at a company like 5arch who loans on a national scale.

Ash Patel · Answer

I have been with the same local bank for over 10 years.  20% down, 4.5% 10yr fixed, either 20 or 25 year amt.  The same would go for a refi.  I believe it pays to stay loyal to a small local lender.  These are all commercial buildings.

Johnny Situ · Answer

@Matty Foley Thanks for the advice. The reason I want to do a cash-out refi right now is that we are already at the personal limit for the traditional mortgages. So wrapping the existing portfolio with a commercial loan would free us up and allow us to buy more (again) with traditional financing. With that being said there are also a few variables:

Non-bank lenders normally charge a lot more in terms of fees (which could be 3x as much as local banks) and their terms are not flexible, although they could provide long-term fixed-rate options with no balloon payment.

This local bank that I want to use, everything looks good from fees to prepayment penalties, only "downside" is the 7-year balloon. I definitely understand the risks within it that's why I want to save up as much cash as possible in case something goes wrong after 7 years, then we could still come up with the money to pay it off.

I can also lock us down with another 30-year fixed option at 6% and pay 20K for the closing costs if so selling one of them in the near future (for a 1031 exchange for example) would not be easily justified because we paid so much upfront (20K) to get it done.

Matty Foley · Answer

@Johnny Situ are these rental properties? Are you doing this because you need the cash-out? If all is equal , I would not give up 23 years fixed for 75 basis points. Who knows what rates you could be looking at in 7 years or 15 years. We’ve all become so accustomed to extremely low rates that anything with a 5 in front of it seems high. historically, it’s a very good rate. I would bet a lot of money that keeping the 5.5% works out heavily in your favor over the next 30 years.

Doug Smith · Answer

I don't think its a bad deal. You could ask them to simply put in an "Interest Rate Reset" at the 7 year mark rather than ballooning it. That way, they still are not taking on undo interest rate risk and you are not having to pay closing costs all over again in 7 years. Good Luck.

Johnny Situ · Answer

@Doug Smith thanks for your advice. I think I am gonna go with this small local bank for a 7-year term loan that’s amortized over 20 years. The fees they are charging is 1/3 compared to other lenders although other lenders could offer 30-year fixed with higher interest rate. And I want to play it safe to save up as much cash as possible over the next 7 years, for the sake of protecting myself if the market goes upside down 7 years later if I can’t refinance or sell the portfolio with reasonable price, then I can still have the money to pay it off. It’s gonna be a challenge but if I can do that, it will put me in a much better financial situation 7 years later. Let me know what you think.

Shay Reddy · Answer

Same situation 10.year balloon refi...but it's cashout....so I am thinking it's a good equity play

Shall I refinance with this commercial loan?

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