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.
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"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."
Rosalind Resnick is the founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and small businesses, and author of Getting Rich Without Going Broke: How to Use Luck, Logic and Leverage to Build Your Own Successful Business. Reach her at email@example.com through her website, abcbizhelp.com.