Business owners and investors looking to refinance their commercial mortgage have big decisions to make. Deciding which lender to engage, what type of loan to secure, and which terms to accept takes foresight, experience, and a healthy amount of knowledge.
The benefits of making an intelligent refinancing decision are obvious – a lower monthly rate, more attractive terms, more cash available, etc. Less obvious, however, are the pitfalls to avoid when attempting to choose the best option for your commercial property.
While you may never feel fully prepared when it comes time to refinance your commercial loan, you can feel far more confident by learning from the errors other investors and business owners have made in the past. Here are 3 of the most common mistakes borrowers make when attempting to refinance commercial loans (and how to avoid them, of course).
Waiting too long to refinance
Commercial loan terms are typically shorter in length than residential home loans. As a result, a small business owner may have to refinance their commercial loan several times before they think about doing the same for the mortgage on their house.
Borrowers who wait until the last minute to create a refinance strategy place an unnecessary amount of pressure on themselves, especially if there is a large balloon payment looming at the end of their current loan term. Those who run out of time are much more likely to end up with a quick fix solution involving high rates and unattractive terms.
By setting aside time to prepare for the mortgage refinancing process months prior to the end of their current loan term, borrowers can take the time needed to identify different lender options and shop for terms that best meet their unique needs.
Prioritizing interest rate above all else
Refinancing a mortgage to secure a lower interest rate is a common desire for business owners and investors. Consider the borrower who purchases a multifamily property that houses few tenants and needs significant repairs. If that borrower re-tenants the property and makes all the necessary improvements, that borrower should be able to recapture the reward of a more attractive loan.
To be clear — the interest rate you will pay each month is certainly a crucial aspect of your new loan. But if you focus on securing the lowest possible rate and nothing else, you could end up with a loan that actually hurts you and your business.
This is because a low rate is often accompanied by a low amount of flexibility. Lenders who offer slightly higher interest rates are more likely to provide offsetting benefits, such as lower documentation requirements, faster closings, and more cash-out flexibility.
If you shop for the best lender option, be sure to study the whole picture – not just the rates, but also the options and benefits too.
Failing to understand the full lender spectrum
Borrowers who fail to qualify for bank programs may feel as though their only option is to work with a hard money lender. For many credit-worthy investors and business owners, this can be a big mistake.
Today’s commercial lender environment is comprised of a wide range of options, each with a different set of requirements and lending appetites.
If borrowers do experience a bank rejection, their first step should be to determine the underlying issue. For instance, if the borrower was denied financing because of their inability to produce tax returns, then a non-bank alternative lender that offers stated income loans could be the perfect fit.
Non-bank lenders understand how common it is for borrowers to face rejection from banks. They can work with you to provide lending solutions that are competitive in many ways, and often superior in others – especially when it comes to required documentation.
Refinancing a commercial mortgage is a decision that shouldn’t be taken lightly. But conducting a sufficient amount of research and working with the right lending partner can help you end up with an attractive solution that meets the greatest number of needs.
Looking to refinance a commercial or multifamily property of your own? Visit Commercial Direct’s Loan Customizer today to customize the exact loan to fit your financial goals.
Zack North is the Director of Marketing for Commercial Direct. As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.