Refinancing Opportunities
Copyright 2014 by Virgo Publishing.
By: David Smyle
Posted on: 11/01/2005



 
It’s nearly the end of 2005, and who would have thought we would continue to see such a low interest-rate environment? The opportunity to refinance and get out of a rising adjustable rate, pull out cash or lower your monthly payment is still available. In this article, I’ll discuss the three most common loan programs based on lender type: banking institutions, conduits and insurance companies. When choosing your program, consider the following factors:
  • Recourse vs. nonrecourse—With a nonrecourse loan, a lender can only go after the property, not the borrower’s assets, in the event of default and foreclosure.
  • Loan-to-value—The maximum loan amount compared to a property’s appraised value.
  • Impounds—An additional amount added to the monthly payment for taxes, insurance or capital improvements (replacement reserves).
  • Term—The due date or maturity date of the loan.
  • Amortization—The period over which the payment is calculated.
  • Assumability—The ability to take over an existing loan during the sale of a property.
  • Prepayment—The ability to pay off a loan before maturity or make additional payments to principal during the term of the loan, with or without penalty.
  • Upfront rate locks—The ability to lock in an interest rate at application vs. approval or closing.
  • Third-party reports—The reports a lender requires to originate a loan, such as appraisal, environmental, inspection, survey, etc.
  • Other loan costs—These include any number of fees, including loan, processing, document, underwriting and legal.

Banking Institutions

Included in the institutional category are banks, savings and loans and credit unions. These sources still provide the majority of self-storage financing due to relationships with borrowers, flexible prepayment-penalty options, quick closings and low costs.

Institutional lenders are not only lending in their local markets. Many are offering nationwide programs with fixed-rate options for three, five, seven, 10 and, occasionally, 15 to 20 years. They also offer amortizations up to 30 years, though 15 to 25 is more common. Loan-to-values can go to 80 percent but are usually between 65 percent and 75 percent. Typical institutional rate ranges vary by market and competition. The following fixed rates were obtainable as of Sept. 1:

The higher-end rates usually apply in small-population or rural areas in which competition is limited. Lower rates are more often provided by large regional or national institutions, which prefer to lend in highly populated areas and major metropolitan markets. Many of the nationwide lenders have minimum loan amounts of $500,000.

Most of these programs offer fixed rates over the first 10 years, and then roll to additional fixed or adjustable rates for the balance of the term. After the initial period, pricing is reconfigured at fixed margins over an index. However, there are some loans that run for a full 25-year term with amortization re-pricing every three to five years.

A recent development is the credit unions’ introduction of commercial lending programs in select markets, which offer very attractive fixed and adjustable rates and often no prepayment penalty. These can be a great alternative to banks, which are sometimes not competitive enough or can’t offer long amortizations. A few credit unions are lending nationwide. Some will only lend to a borrower if he qualifies for membership by living, working, worshiping, etc., in a credit union’s local, regional or state market area.

Conduits

Conduits (securitized lenders) are the predominant source of low, long-term, fixed-rate financing. They offer spreads that range from 1.1 percent to 1.4 percent (110 to 135 basis points) over the corresponding Treasury (usually the 10-year Treasury). At the time of this writing, the Treasury is at 4.2 percent, putting the overall interest rate between 5.3 percent and 5.5 percent for a fixed, 10-year term with a 25- to 30-year amortization. Maximum loan-to-values are 75 percent, with 80 percent on exception. Fully amortized 15- and 20-year fixed rates are also available.

Conduit loans carry much higher costs than bank loans. Expenses can range from $10,000 to $30,000 for appraisal, environmental, survey, legal and inspection reports. This does not include loan or survey costs and other fees, all of which can be built into the loan to reduce out-of-pocket expenditure. Prepayment penalties are usually tied to defeasance, but can also use yield maintenance or a fixed step-down percentage. (For greater explanation, visit www.defeasewithease.com.)

Minimum loan amounts for most conduits are $2 million or more, though a few conduits offer programs for amounts as low as $500,000 to $1.5 million. These loans require more paperwork and time to close (usually 60 to 75 days), but they offer upfront rate locks for a 2 percent refundable deposit. Conduit loans are mainly nonrecourse, but they require carve-out guarantees and prefer single-asset entities as borrowers. They also demand higher coverage limits for title and property insurance as well as endorsement requirements.

Originators of conduit loans are mainly commercial mortgage bankers, mortgage brokers and some banks. Their nationwide programs also apply to Canada.

Insurance Companies

Insurance companies are also strong providers of long-term, fixed-rate financing with terms of five to 25 years and amortizations up to 25 years. Their rates are typically 125 to 175 basis points over the Treasury, loans are nonrecourse, and costs are similar to those of conduits. However, when it comes to prepayment penalties, insurance companies tend to cherry-pick only the better-quality facilities, typically those constructed of wood frame or masonry, not metal, and located in major metropolitan areas. Insurance companies also tend to be more conservative on loan-to-value (60 percent to 75 percent), though they’re more flexible with regard to impounds.

Because insurance companies are portfolio lenders, they can be creative with term and amortization and really love self-amortizing product. Loans are typically obtained from correspondents (usually commercial mortgage bankers), not directly from the insurance companies themselves.

Overall, it’s still a great time to refinance. Despite the rise in short-term interest rates, long-term rates have remained relatively stable. Whether you’re trying to take out a construction loan or replacing existing financing, it’s not too late to take advantage of great opportunities.

David Smyle, president of La Mesa, Calif.- based Benchmark Financial, is a mortgage banker and 20-year veteran of the commercial-banking industry. His company offers financing solutions for self-storage, apartment and commercial properties nationwide through its direct-lending relationship with bond street capital as well as other institutional financing sources. For more information, call 877.862.7916, ext. 201; e-mail loans@benchmarkfin.com; visit www.benchmarkfin.com.