Real Estate Investor · Los Angeles, CA · Member since 2014 · 237 posts · 67 votes
I have a few commercial loans with 10-12 years left on them. The rates are held for the life of the loan. I asked my commercial banker if there are any ways I can take advantage of the low rates. They said they could lower the rate for them by 1% in exchange for $1k and having the rate hold lowered to 7 years with the rate adjusting annually after that.
I would be saving $2k/year on my monthly payments. I would basically have to count on the interest amount increase to be less than $13k for the last 3-5 years on my loans. It seems like a no brainer to me. Do people see interest rates increasing drastically 7 years from now?
Also, why would the lender be willing to do this if it is such a killer deal for me? They would be making less money per month on me. I feel like I am missing something big here.
@Jerry Poon you are trading 3-5 years of interest rate lock/security for the cash saved for the lower rate. Could be a good bet, but you do increase your risk profile. Alternatively, the bank gets a chance at a higher refi earlier and more than once. Why would they? Since they control spread over the rate, they have a little more flexibility to gain back profit on refi's. They also might be trying to match the general market and keep your loan with them? And in a period of low interest rates, probably good to move more loans to reset earlier so you don't get trapped holding too much low interest paper....
@Jerry Poon you are trading 3-5 years of interest rate lock/security for the cash saved for the lower rate. Could be a good bet, but you do increase your risk profile. Alternatively, the bank gets a chance at a higher refi earlier and more than once. Why would they? Since they control spread over the rate, they have a little more flexibility to gain back profit on refi's. They also might be trying to match the general market and keep your loan with them? And in a period of low interest rates, probably good to move more loans to reset earlier so you don't get trapped holding too much low interest paper....
@Jerry Poon you are trading 3-5 years of interest rate lock/security for the cash saved for the lower rate. Could be a good bet, but you do increase your risk profile. Alternatively, the bank gets a chance at a higher refi earlier and more than once. Why would they? Since they control spread over the rate, they have a little more flexibility to gain back profit on refi's. They also might be trying to match the general market and keep your loan with them? And in a period of low interest rates, probably good to move more loans to reset earlier so you don't get trapped holding too much low interest paper....
@Jerry Poon My pleasure. Its actually a really fun question, what is the advantage to the bank? Stuff above still true but you Got me thinking:
1) It cost them 13K in interest payments, but its not really 13K is it? its 12K with the 1K fee subtracted and you almost certainly won't refinance within the year, so its actually 10k after you add back the first years 2K. Is there a pre-payment fee? That lowers their cost more and they can probably quantify the risk of you refi-ing in years 2-7.
2) The now 9-10K maximum cost is a drop in the bucket of their total theoretical revenue they stand to make over the term of the loan through the interest payments. And by doing this they lower the risk of the loan defaulting and make it more likely the loan--and the projected revenue they now have on their books--remains with them.
3) Again, in a low interest rate environment its probably better for them to lower their reset time. I mean, if they could reset every month they likely would make more money, but people wouldn't borrow from them. So from 10 to 7 is better for them. They love 5 year resets
@Jerry Poon My pleasure. Its actually a really fun question, what is the advantage to the bank? Stuff above still true but you Got me thinking:
1) It cost them 13K in interest payments, but its not really 13K is it? its 12K with the 1K fee subtracted and you almost certainly won't refinance within the year, so its actually 10k after you add back the first years 2K. Is there a pre-payment fee? That lowers their cost more and they can probably quantify the risk of you refi-ing in years 2-7.
2) The now 9-10K maximum cost is a drop in the bucket of their total theoretical revenue they stand to make over the term of the loan through the interest payments. And by doing this they lower the risk of the loan defaulting and make it more likely the loan--and the projected revenue they now have on their books--remains with them.
3) Again, in a low interest rate environment its probably better for them to lower their reset time. I mean, if they could reset every month they likely would make more money, but people wouldn't borrow from them. So from 10 to 7 is better for them. They love 5 year resets
@Jerry Poon reset is the time when the interest rate changes to the new rate after 5 years, 7, 10 or whatever else the bank has in the contract. Some have balloons where the whole note is due and it forces the refi, other loans just change the interest rate.
@Jerry Poon reset is the time when the interest rate changes to the new rate after 5 years, 7, 10 or whatever else the bank has in the contract. Some have balloons where the whole note is due and it forces the refi, other loans just change the interest rate.
@Jerry Poon reset is the time when the interest rate changes to the new rate after 5 years, 7, 10 or whatever else the bank has in the contract. Some have balloons where the whole note is due and it forces the refi, other loans just change the interest rate.
They gave me a formal quote today that came out to annual savings of $1570, not $2000. That's almost 25% less than what I expected. So basically I would be saving $10k over 7 years and then the rest of the life of the loan would be game to annual interest fluctuations. What are your thoughts?