Underlying Mortgages

All co-ops have underlying mortgages, but not all mortgages are created equal. When it comes time to renew, how does a co-op sort out which one is right for them?

The first step is to take a look at your existing mortgage to find out its maturity date, because it will need to be refinanced. You’ll want to see if there is a prepayment penalty, and 99 percent of the time there is. A lot of mortgages have a 90-day window at the very end where you can prepay with no penalty. If you can manage that juggling act, great. But there are problems that can arise, so it’s not always wise to wait.

Can you give an example?

Every new funding requires a title search, and there may be a violation or some other issue you’re not aware of, which could delay things. Also, these days banks often want litigation searches, so if your building has been involved in litigation, the bank is going to want an explanation of what’s going on or will want to be sure you’re covered by insurance. These are things that are good to know a little further in advance, so that you don't get caught at the very end.

These seem like administrative issues that can trip you up. Are there opportunities with your current lender that boards should explore?

Some loans have options where you can extend for five additional years at the current market rate and pay only a minimal administrative fee up front to the bank. You end up saving legal and title costs, and possibly a mortgage tax.

So when should a board start paying attention to their underlying loan?

For a 10-year loan, I’d say around the eighth year. There may be an opportunity in the current market with certain prepayment penalties where making a quicker move will save money in the long term. For example, you may be at a 5 percent interest rate and grab a 3.5 percent rate for 10 years. In those situations, you should have your accountant or management run the numbers.

Since there are so many different kinds of underlying mortgages out there, should a board stick with their current bank or move to a new one?

Staying with your bank generally makes the refinance process easier because they know you. But it may make more sense to look around for the product that best matches your needs or comes with special benefits. A lot of banks now offer a prepayment penalty plan that allows you to pay 10 percent of your principal in any given year with no penalty. That’s great for buildings with a lot of cash on hand. Buildings that are strapped with their mortgage or facing a big capital project may want to look at banks that have national charters where you can become a member and save by not paying the mortgage tax on the new money. New York State charges a mortgage tax of 2.8 percent, so the savings can really add up. Whichever direction you go, you should always get a professional to help.