Refi Reality

Q:

We are refinancing our underlying mortgage. What should we do to make the process go as smoothly as possible?

A:

There are three critical elements of any successful underlying mortgage refinancing: planning, pricing, and processing.

Pricing

Let’s start with the most misunderstood element of these three essentials: pricing. It is not, as most people assume, the interest rate offered by the lender. Although your new loan’s interest rate will be an important factor, a low interest rate does not necessarily make a loan “good.”

If you substitute the word “payment” for “pricing,” you’ll get a better picture of what I’m talking about: not just the monthly loan payment but the total payment required to close and carry the new loan. That includes your new loan’s monthly installment of principal and interest and also any origination or commitment fees (“points”), tax and insurance escrows, operating or reserve accounts demanded by the lender, repair escrows, and penalties for violating other loan terms (e.g., late fees or prepayment penalties).

All of these elements make up the “pricing” of a loan, and the board and its professional advisers must evaluate each of them in the context of the cooperative’s goals and budget. Mishandling one or more of these other factors can have a much bigger impact on the co-op’s finances than shaving a few basis points off the interest rate (a “basis point” equals 1/100th of 1 percent).

Processing

The next area of concern is the processing of your loan. Some boards are so relieved to receive a commitment letter with the loan terms they requested that they almost forget the important work remaining to be done before their new loan can close. Many commitments contain a list of contingencies that must be cleared or documents that must be provided before the lender will schedule a closing. The co-op’s attorney can handle many of these items, but the board must not overlook anything for which it is responsible.

I have seen some boards argue a minor provision for so long that their commitment expires, costing them the “good deal” they worked so hard to get. Some co-op attorneys forget to give their client’s existing lender the required payoff notice, forcing the closing to be rescheduled (and sometimes incurring a hefty extension fee on the existing loan). Or someone misplaces the existing loan documents, thereby preventing an assignment and forcing the co-op to pay a mortgage recording tax on the full amount of their new loan.

A few boards are too clever by half. They use their lender application letters or term sheets (and sometimes even commitment letters) to “shop” for lower interest rates with other lenders. All lenders hate this practice and, when they inevitably discover it, usually rescind their loan offer (and, in the case of a commitment letter, possibly keep the co-op’s good faith deposit).

Planning

Because refinancing an underlying mortgage is the most important financial decision that a board will ever make, it warrants careful and thorough planning. Make full use of your professionals: your managing agent, attorney, and accountant. They will help you enter the market at the right time, borrow the right amount, and include the right terms and conditions in your loan documents. Whatever they charge you for their advice is money very well spent.

Together, these professionals can help you choose a loan structure and select a lender. They also can review your loan application, commitment letter, and new loan documents to ensure everything meets the board’s objectives.

So remember planning, pricing, and processing – the three keys to refinancing success. Forget them at your peril (yet another “P”). Follow them and you can celebrate at the post-closing party (ouch!).