Navigating the Pros and Cons of a Cash-Out Refinance
Author: Alejandra Torres
If you’re currently paying off a commercial mortgage and you need funds for business or investment purposes, you may be wondering what options you have available. The answer, at least for some borrowers, is choosing a cash-out refinance. Although this is a popular option among many borrowers, not everyone is familiar with the process and knowledgeable on whether or not they would benefit from this financial solution.
A cash-out refinance is exactly what it sounds like—an investor gets liquid cash by replacing an existing mortgage with a new (and bigger) loan. Traditionally, they end up borrowing more than they owe, so if the property has gained significant equity, the borrower can potentially be left with a large amount of cash.
The reason why it’s a common choice for investors is the freedom that comes with liquid cash. From revamping their commercial space to funding a new business venture, the possibilities are endless. However, there are also a few setbacks to think about.
In order to properly guide you on whether or not you should consider a cash-out refinance, we’ve highlighted both the pros and cons of this financial solution. Depending on your case, refinancing a commercial property could be a good move, but others may want to steer clear.
The most appealing aspect of cashing out is the—you guessed it—cash-flow. Although this means the borrower is restarting a new loan period, they will get access to funds that can be used towards different avenues.
Small business owners may choose to fund other projects separate from their commercial space. Perhaps pay off another debt or maybe fund a new project. Meanwhile, a borrower who wants to invest more into an existing commercial property can use the cash out to make improvements and renovations that may ultimately lead to more income.
Whatever the reason, borrowers have the ability to make more revenue and therefore, easily pay off the new mortgage.
Low Interest Rates
There are many reasons why an investor would want to refinance. Sometimes they would prefer to avoid the ever-impending balloon payments that arrive at the end of a loan term. Other times, borrowers simply want better and lower rates.
A cash-out refinance usually means the investor is opting in for a bigger and better commercial loan that is accompanied by attractive benefits. Say they get a mortgage with an amortizing period of 30 years, the rates might become significantly lower.
And with low interest rates, there’s also an opportunity for lower monthly payments. This leaves the borrower with more income and the possibility to improve their financial situation.
Small business owners who want to invest more money into their property with a cash-out refinance can potentially look forward to added benefits at the end of the year.
Take for example, an investor who uses the liquid cash to work on the physical characteristics of the commercial property and considerably improves the space. Because of that, they may enjoy a tax break at the end of the year by deducting the mortgage interest from their taxes.
Keep in mind the tax benefits aren’t as large as they used to be. Reach out to a consultant for more information on which deductions you can qualify for after choosing a cash-out refinance.
Sure a cash-out refinance can provide instant money and more suitable rates, but keep in mind, this also means you’re essentially restarting a loan period. In other words, payments can be dragged out for decades (yes, decades).
Some borrowers may view this as a pro because the payments are spread out and consequently, have lower interest rates and payments. However, a new mortgage means more payments, so (depending on the new interest rate) you are essentially increasing your lifetime interest costs.
If you’re an investor who would rather avoid more mortgage payments, refinancing a loan may not be the optimal decision.
It’s no secret—obtaining a loan is risky. Borrowers who choose to refinance are extending their repayment period and taking on additional closing costs for the transaction. It’s important to know the risk when entering a new mortgage.
Before making a decision, speak to a consultant about how much cash should be taken out during the refinance to ensure you’re not taking more out than absolutely needed.
At Commercial Direct, a division of Silver Hill Funding, LLC, our team of loan officers can guide you on getting a cash-out refinance whatever your financial situation is. Check out our refinance page to learn more about our variety of programs and see if one fits your needs.
Silver Hill Funding, LLC and its successors and/or assigns as their interest may appear, is the proposed lender. Commercial Direct is a division of Silver Hill Funding, LLC.
As the Content Specialist at Commercial Direct, Alejandra Torres writes and educates readers on all things business. When she’s not breaking down the steps to obtaining a commercial mortgage, you can catch her reading up on the latest market trends or watching the next big business venture on Shark Tank.