When deciding on the terms of a commercial refinance loan, the traditional system used is that of the Discounted Cash Flow system. Making a comparison on the existing loan and the proposed one on a Net Present value basis. However, there are several factors which commercial property owners are mostly interested in. Examples of these factors are: How the refinance affects their monthly cash flow, what the closing costs are, how much of the closing costs will come out pockets, how many months it will take the borrowers to repay the lenders’ closing costs as well as what the principal pay down (amortization schedule) will be compared to the existing loan.
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Most borrowers have the improving of their cash flow situation as the main concern when refinancing. This can be achieved in two main ways. These include the reduction of interest rates as well as an increase in the length of the loans amortization schedule. It is very practical to reduce rates and borrowers are often surprised to learn that spreading out a loan from 20 to 30 years reduces the borrower’s payment by about 20%. There are, however, borrowers who fail to realize the improving of their situations since monthly payments begin hiking. This is often due to changing of market rates or even loan programs. The borrower’s books may also be not as strong as they were during the securing of the existing loan. The resultant situation is where they are not eligible for the same rates and programs that they had qualified for earlier.
Yet another point of concern for borrowers is that of closing costs. The reason for this is the increasingly high rates of appraisals, environmental reports, processing as well as bank fees. On a refinance, the borrower is normally able to roll most of these costs into the loan amount. When it comes to out of pocket costs, the borrower should ready himself to pay the appraisal and environmental fees upfront. Payment of the processing fees upfront may sometimes be required by the bank.
Assuming that a reduction in monthly costs occurs, then most borrowers are keen to determine how long it will take for the savings to pay back their closing costs by carrying out a cash flow analysis. An example is if the new monthly loan payment is $2,000 lower and the total closing costs are $10,000, then it will take 5 months for the borrower to break even.
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Another very important component of commercial loans is the principal pay down. Business owners are however, more often concerned with cash flow. This is especially for business owners with highly leveraged properties. This is made necessary by high debt payments as against net cash after the expenses have been paid.
A borrower is expected to harbor all these concerns before he takes out a commercial refinance loan since they are all valid.
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