The Going Rate
Question: Now that interest rates have come down, do you think it makes sense to refinance the mortgage that we took out to buy our company's building? We're currently paying 8 percent on a 15-year loan, and we still have six years left on it.
Answer: Deciding whether to refinance your mortgage is more than an exercise in doing the math. While short-term interest rates have fallen dramatically since the Fed started cutting interest rates last fall, long-term rates remain relatively high. Though 15-year mortgages are currently hovering at about 6.2 percent for residential property, rates on office buildings are still above 7 percent. Even if you can get a better deal on your building's mortgage, you might face stiff prepayment penalties in addition to legal fees, title insurance and other closing costs.
One way to get a lower rate is to "lock in" for a shorter term--say, five or 10 years--but there are risks involved in that strategy, too: If interest rates rise over the next few years, you might end up paying more than you would with your current mortgage.
"The rule of thumb is unless you can save at least 1 percent on your mortgage, it doesn't make sense to refinance," says Alex Vithoulkas, business development manager of Mortgage World Bankers Inc. "If you have a mortgage with a 15-year term, you're probably better off keeping it the way it is [rather] than refinancing your debt from the beginning."
Most of the calls coming in from commercial property owners these days are from investors with small mortgages who bought their buildings a long time ago and are now looking to cash out and buy additional property. Says Vithoulkas, "Now is as good a time as any to take advantage of the equity sitting in your investment property."