In most cases, refinancing for a commercial property comes from a new commercial property loan. Owners can opt to refinance to lower their monthly payments or change loan terms and even use the equity for improvements. Before you refinance your commercial real estate, it’s important to understand the advantages and risks of the process.
Commercial property refinancing
Commercial property is real estate that houses businesses used in capacity to generate income. It’s made of office buildings, retail spaces, and industrial properties. In other cases, commercial property can also include large residential apartment buildings.
Refinancing commercial real estate works similarly to residential mortgage refinancing. The process entails using the money from a new loan to pay the existing one. Borrowers usually refinance their loans if they qualify for better terms, such as a lower interest rate or another commercial property loan type.
Pros and cons of a commercial property refinance
Pros
Potentially lower monthly payment. The top reason people want to refinance is to lower their monthly payments. This is usually done by securing a lower mortgage rate than what you currently have on your existing loan.
You can opt for better loan terms. Adjusting the loan repayment term or type can be beneficial if you own commercial real estate. For instance, if you presently have a variable rate loan, refinancing into a fixed-rate loan may provide more stability in your repayments if rates were to go up.
Avoid a hefty balloon payment. Balloon payments are large, lump-sum payments paid as the remainder of a loan amount. Commercial loans typically have a shorter repayment period than traditional mortgages — usually taking five to 25 years compared with 30 years in a residential mortgage. Refinancing commercial real estate may help you avoid such a big payment at one time.
You can borrow money tax-free with a cash-out refinance. Using a cash-out refinance on a commercial property loan, it’s possible to borrow more money than you currently owe, as well as get the difference between the two loan amounts in cash. Investors usually use the cash to either make improvements to the property or even buy new investment properties.
Cons
You’ll pay hefty upfront costs. Refinancing a commercial property comes with closing costs, just like when you took out your loan the first time. Ensure that the savings from your new loan will outweigh the cost of any fees you’ll pay upfront.
You could face a prepayment penalty: Some lenders may charge a prepayment penalty for paying off a loan early, which will add to your costs. Talk with the lender about this.
What lenders will refinance a commercial property?
Many lending institutions and banks offer commercial property refinancing. Lenders will offer loan programs with unique processes and inclusions, so do ample research with at least three different companies to find the right loan for you.
Who should consider refinancing commercial real estate? You can start considering refinancing commercial real estate and, subsequently, a commercial property loan once you know that you can get a better interest rate. Another good reason is if you want to change your loan terms and if you want to take advantage of the equity you’ve built in the property.