Refinance Loans to Lower Interest Rates and
When interest rates are falling, take advantage
of the dip to refinance your existing business debt and put
more dollars in your pocket.
Of course, you can check to see
if your bank can trim the interest rate on your mortgage by
two or more percentage points. The loan origination fee and
other closing costs may work out to a few points, but you
might be able to recoup this amount in less than a year
because of the interest rate savings.
But don't stop there.
If cash flow isn’t a problem for your company, consider a
different arrangement. Instead of reducing your monthly
payments, refinance to reduce the term of your mortgage.
Because of the lower interest rate, you may pay off your
mortgage faster while keeping the same monthly payments.
|A rule of thumb: If you own mortgaged real estate or other
property that you expect to keep for at least two years,
refinance when rates drop by 2 percent. That way, you
can reduce your monthly mortgage payments. Depending on
the number of years left on the loan, you could end up
saving thousands of dollars.
Sometimes, businesses can profit by getting creative. For
example, one medical group practice financed its own office
building several years ago with a $1 million mortgage at 10
percent. When rates dropped below 8 percent, they explored
some refinancing options.
One of the partners in the practice owned a home with more
than $1 million in equity. The bank was more than happy to
finance the doctor’s residence. The doctor used the $1 million
he borrowed on his home at 7 percent to pay off the 10 percent
loan on the office building.
The savings — 3 percent of $1 million — equaled $30,000 a
year. The doctor’s loan origination fee and other closing
costs came to roughly 2 and 1/2 points or $25,000. In the
first few years, the physician more than recouped these
charges from his interest savings.
Indeed, considering the 25-year term of the new mortgage,
the effective annual cost of the refinancing was only $1,000
So look at all your credit costs on buildings, machinery,
equipment, inventory, accounts receivable and lines of credit
to determine if you can save by refinancing.
Call Ronald J. Cappuccio, J.D., LL.M.(Tax) at (856)
665-2121 to review all loan documents, as well as rates and
collateral reported in the footnotes to your financial
statements. Sometimes, we can negotiate terms that reduce the
collateral if you make loan payments promptly for a certain
Always question the rates your bank offers you. Many people
think that prime rates are for prime customers only. This is
not the case. Try asking for the London Inter Bank Offered
Rates (LIBOR), which are often cheaper than prime rates for a
bigger customer with good credit.