When coming up with the terms to be used for a commercial refinance loan, the Discounted Cash Flow System is the traditional system that is used. Making a comparison on the existing loan and the proposed one on a Net Present value basis. There are however a number of factors that most commercial property owners are customarily interested in. These include: How the refinance affects their monthly cash flow, what the closing costs are, how much of the closing costs will come out pockets, how many months it will take the borrowers to repay the lenders closing costs as well as what the principal pay down (amortization schedule) will be compared to the existing loan.
The majority of borrowers are interested in improving their cash flow situation when refinancing. This can be achieved in two main ways. These include the reduction of interest rates as well as an increase in the length of the loans amortization schedule. The reduction of rates is quite pragmatic and borrowers are mostly surprised to learn that spreading out a loan from 20 to 30 years reduces the borrowers payment by about 20%. However there are borrowers who may find that their situation does not improve as their monthly payments begin going up. This is often due to changing of market rates or even loan programs. Also the borrowers books may not be of the same strength as they were when the existing loan was being secured. This results in a scenario where they do not qualify for the same programs and rates that they had attracted earlier. r.
Another area of concern for borrowers is closing costs. This is necessitated by the increasing rates of appraisals, environmental reports, processing as well as bank fees. In a refinance arrangement, the borrower is often able to roll most of these costs into the loan amount. Out of pocket costs will often necessitate a borrower to pay the appraisal and environmental fees upfront. A bank may sometimes also require that the processing fees be paid up front.
With the assumption that a reduction in monthly payments will occur, then most borrowers will be concerned with the carrying out of a cash flow analysis to determine how long it will take for the savings to pay back their closing costs. For instance, should it happen that the new monthly loan payment is $2,000 lower and the total closing costs are $10,000, it will take 5 months for the borrower to break even.
Another very important component of commercial loans is the principal pay down. Business owners are however, more often concerned with cash flow. Business owners with highly leveraged properties especially fall into this category. The reason that this is made necessary is the high debt payments versus net cash after the expenses have been paid.
A borrower is expected to harbor all these concerns before he takes out a commercial refinance loan since they are all valid.
