New Rates Are Impacting Commercial Mortgages
GRAND RAPIDS — About two years ago when interest rates began rising, commercial mortgage customers began to worry and locked in their rates around 9.5 percent. Recently, the prime rate has dropped to 7.5 percent and is expected to drop another quarter- to half-percent within the next few days.
So what do the 9.5-percenters do about it?
Re-financing is the key, according to Paul Kramer, executive vice president of United Bank. He said many borrowers are turning to re-financing and locking in a new rate.
“This area is rich with small businesses and they are always very active in trying to get the best deal. With prime dropping, borrowers on floaters see this as an opportune time to lock in their rate for another three to five years,” Kramer said.
The “floaters” to which Kramer was referring are interest rates that rise and fall as Federal Reserve rates fluctuate. Many borrowers who decided on floating rates a few years ago when rates were high are now seeing this as a chance to lock in a low rate and therefore pay less in the long run.
“If someone can lower their interest rate they can knock time off the end and therefore reduce the total amount they are paying,” Kramer added.
He explained that many corporate customers when obtaining a loan based on a floating or variable rate have several options. The two most popular are LIBOR rate pricing and prime rate.
LIBOR is an international rate that is historically and generally offered to more secure and low-risk customers with a rate that can change over variable time spans.
Customers are offered an interest reset date of 30, 60 or 90 days, where the interest rate changes based on what the LIBOR rate has done. The better choice then lies in what the lending institution and the customer feel comfortable with.
LIBOR rate pricing is based on the day-to-day international rate and the Fed controls the prime rate.
Kramer gave the example of a $250,000 mortgage that is priced at a 10 percent rate, with a 180-month amortization. The payment would be $2,686.51 per month.
Were the interest on that loan reduced to 8 percent, with all other terms to remaining the same, the payoff would be in 146 months; a 34-month difference in payoff maturity.
He explained that re-financing also incurs a fee, but one that could end up costing the customer less in the long run.
“When a business decides to re-finance they are going to have to pay a fee but the way they are looking at it is if the rate drops enough it might be worth it to pay the pre-payment penalty,” said Kramer.
“If the rate has dropped 2 percent it is better to pay the one- to two-point fee, get out of the mortgage and go to another lender.”
With the current competitiveness of banks and many of them trying to out-liberalize each other, research can disclose some very competitive rates.
Kramer recommends getting a few numbers and seeing what other banks are willing to offer, and then approaching lenders with those numbers so they have something to bargain with in the loan committee. But re-financing may not be the only route to go.
“Banks are very competitive and we live in a thrifty town where everyone is trying to get the best deal,” Kramer said. “And sometimes that doesn’t mean to re-finance but to look at other alternatives for the business.”
Kramer stated that other options may include borrowing more money to tune up the business or expand with the same amount of money, under a lower interest rate. “It is interesting to watch the motivations behind people and the stimuli that makes them do what they do with their business and start the types of businesses they do.”
A spokesman for Fifth Third Bank stated that re-financing may also be a way of negotiating a better rate based on current business standings.
A company that may be succeeding in business may approach a bank and request a lower rate based on the current standing of that industry.
Businesses that Kramer have noticed increasing in number and doing well are home construction-related firms as well as construction businesses of any kind.
“Cars and houses seem to drive our economy but when one sector is down, the other is up and that seems to be the way the market goes,” he said.
The areas that Kramer noticed to be slipping a bit were some components of retail business. Piano retailers, boat retailers, luxury and toy items seem to be what is suffering, Kramer said.
“With the economy down people are buying the more necessary items and tending to not go out and buy the toys and things that are just for fun.”