How to Refinance a Commercial Real Estate Property?

How to refinance a commercial property

Refinancing a commercial property can be a savvy financial decision for real estate investors. By refinancing the mortgage of a commercial property, you have several options to free up cash and change the loan terms. Here is a quick guide on refinancing commercial property.

Reasons to refinance your mortgage

Before making decisions concerning your mortgage refinance, you will want to determine your end goal. Below are some reasons why refinancing may be beneficial to you.

  • Lower monthly payment and interest rate–  Many people choose to refinance their mortgage because the current mortgage interest rates are lower than when they initially applied, leading to a lower monthly payment and more cash-in-hand.
  • Change mortgage interest rate type – If you went with an adjustable-rate mortgage when you purchased your home but now qualify for a fixed rate, you could refinance to switch rates.
  • Adjust loan term –  If you want to save on the total amount of money you pay in interest over the life of a loan, you can shorten the loan term. Alternatively, extending the life of the loan could reduce monthly payments.

Cash-out refinance

Whether you are a commercial investor, cash-out refinancing is a great investment tool. When refinancing, you replace your existing mortgage amount with one that is higher than what you owe on the property. The reason being, you are actually pulling money from the equity of the commercial property use it for other purposes. You can use these funds for any needed renovations or repairs. This can help to increase the value of the property. You could also choose to invest that money into new projects or simply have emergency cash on hand or you can simply hold onto the money for a rainy day or when new opportunities may arise.

Easy ways to prepare for a commercial property refinance?

To prevent any closing delays or mishaps, there are ways you can prepare in advance for a smooth closing process. Here are some things to consider if you are looking to refinance:

  1. Establish your goal: Are you looking to lower your monthly payment and interest rate? Do you want to change the type of rate? Are you looking to cash out on the property’s equity? These are all questions to consider beforehand to make sure you are choosing the right refinance loan.
  1. Prepare your documents ahead of time: You will be asked to provide several documents for your refinance. Your lender will need to confirm your financial history, income, and assets, among other things. Here are some examples of documents you will need:
  • Last two pay stubs / rent receipts
  • Bank statements for savings, checking, and business accounts
  • Last two tax returns and W-2s
  • Copies of rental lease(s)
  • Proof of homeowners insurance

If you are an investor, lenders will also consider the business’s operating history, net operating income, and credit.

Key takeaways:

  • Refinancing your commercial loan can lower your monthly mortgage payment to free up money for other projects and investments.
  • Homeowners and investors can take advantage of ‘cash out’ refinances to get money on hand to invest back into the property to increase the value.
  • There are ways all borrowers can prepare in advance for a smooth refinance process.
  • You want to get out of an adjustable-rate loan. If you took an ARM loan because of its attractive introductory rate but now wish you had a fixed-rate loan, refinancing may be your best bet. You can apply for a fixed-rate loan and have a more predictable mortgage payment, cash flow, and profits from your investment properties.
  • You can afford a shorter term. If you took a 30-year term, but are now in a better financial position, you may consider refinancing into a shorter term. Commercial property mortgage loans are available in 1-, 5-, 10-, 15-, and 20-year terms allowing you to save money on interest and gain equity in the rental or investment property faster.