If you're a commercial property owner looking to refinance your mortgage, one of the first strategies your savvy peers will advise is to establish goals and realistic expectations.
Other practical tips for refinancing mortgage loans you'll likely hear include preparing your finances and shopping around for the best rates. Comparing offers and running the numbers are just as vital.
Following such tried-and-tested commercial mortgage tips when refinancing has become even more crucial, given today's higher interest rates.
As reported by S&P Global, for instance, commercial real estate (CRE) loans originated in 2024 had an average interest rate of 6.2%. Conversely, maturing mortgages had a rate of only 4.3%, an increase of almost 200 basis points.
With the right property refinancing advice, commercial property owners like you can optimize loan terms that better align with your financial needs and status.
What Does It Mean to Refinance a Mortgage?
When you refinance a mortgage, it means you'll replace your existing loan with a new one. It can be with the same lender, but in many other cases, it's a different lending institution.
If done right, refinancing for business owners and commercial property owners can help:
- Secure lower interest rates
- Lower monthly mortgage payments
- Improve cash flow
With a well-thought-out mortgage refinancing strategy, you can boost your financial flexibility and business profitability. Depending on what you use the property for, you may even refinance as a way to reposition it for growth through improvements.
When Should You Not Refinance?
While refinancing commercial property mortgages offers many potential benefits, it's not for everyone. It's not advisable if:
- Current refinancing rates are higher than your original loan's
- The value of your commercial property has had a significant drop
- Your business financials, such as income and credit, have weakened
- Your existing loan comes with high prepayment penalties
The golden rule of refinancing is that if it doesn't offer any clear financial benefit to your situation, it's best to avoid it.
What Are Practical Tips for Refinancing Mortgage Loans for Commercial Properties?
Establishing what exactly you want and expect from refinancing is the first and most crucial step before modifying or replacing your current mortgage. If today's offers align with your goals and expectations, you should then:
- Prepare your finances
- Shop around
- Compare at least three offers
Before finalizing your decision, rerun the numbers to ensure the new loan will serve its purpose, whether it's to lower your interest charges or reduce your monthly payments.
Establish Goals and Expectations
When deciding whether to refinance your existing mortgage or not, other commercial property owners will advise you to define your objectives first. If it's to reduce the total amount of your debt, ensure the current rates are more favorable and lower than what you're paying at the moment.
If you want to pay off your mortgage sooner, ensure the offered terms align with your goal and that refinancing won't be too expensive.
Suppose you still have 15 years on your current mortgage. You may be able to shorten this to 12 or even 10 years through refinancing, and if the rate is lower, you can also decrease the total interest you'll otherwise have to pay.
Prepare Your Finances
Since refinancing your mortgage means taking out a new loan, expect lenders to carefully assess your financial situation. They'll check your credit score and review your credit history (both personal and that of your business), so you want these to be in the best possible standing before you apply.
Get copies of your credit reports and ensure they don't have any errors on them. Reporting mistakes can lower credit scores and harm your refinancing eligibility.
Dispute all the wrong items you see on your reports and have them fixed before applying.
Shop Around and Compare Offers
With your financials ready, it's time to shop around for offers and compare rates and fees from several commercial real estate lending institutions offering refinancing programs. Once you find the most suitable rate, see if the lender can lock it in for you.
The lock rate period depends on one lender to another. As explained by Investopedia, some offer 30 days, while others offer 45 days, for free. Use your negotiating skills to help you secure a term and period that best suits your needs and preferences.
Do the Math
Before you sign on the dotted line when refinancing your mortgage, rerun the numbers, and be sure to factor in other fees, such as closing costs and insurance. Find out your break-even point, which is the length of time it will take for any savings you generate to cover the closing costs.
Don't forget to stay up-to-date with the payments on your old mortgage. Keep making them on time until you've finalized the new loan and cleared the old balance.
Frequently Asked Questions
What Should You Not Do Before Refinancing?
As much as possible, don't apply for new credit (e.g., credit cards, business line of credit, or equipment loans) before you plan to refinance. Doing so can affect your credit score and report, which could jeopardize your refinancing eligibility.
Don't make any late payments on your existing debt, either. As with applying for new credit, this can result in your credit score and report taking a hit and potentially lowering your odds of qualifying for a refinance.
What Disqualifies You From Refinancing?
You may get disqualified from refinancing mortgage loans for commercial properties if you have poor credit or an unstable cash flow. The property having a low market value or the business showing a weak performance can also make you, the owner, ineligible for refinancing.
Multiple negative items on your credit report, such as delinquencies and defaults, can affect your qualifications for refinancing, too. It's also for this reason that you should check your credit report to confirm it has no errors.
Keep These Mortgage Refinancing Tips in Mind
From establishing goals to setting realistic expectations, prepping your finances, shopping around, and doing the math, these are all practical tips for refinancing mortgage loans for commercial properties. Keep all of them in mind to increase your chances of getting approved for a new loan.
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