How the Refi Conversation is Changing

The refi challenge. With today’s rising interest rates, refinancing an underlying mortgage has never been more challenging. Boards are typically conservative and opt not to increase the amount of their mortgage, figuring they can realize savings between the old rate and a new lower one. But that’s not possible now.

Working the numbers. Co-ops typically have balloon mortgages that come due in 10 years. These can be interest-only or amortized, and if amortized the co-op has paid part of the principal during the 10-year period. 

I recently worked with two co-ops that managed to pull off their refi’s successfully by extending their amortization period. The first building had a $12 million balloon loan, had paid down about $2 million of it and had about two years left before it came due. It refinanced the balloon, borrowing slightly over $14 million, and we increased the amortization period from 30 to 40 years. This enabled the co-op to put a significant amount of money into reserves for capital projects, while paying the same or less principal and interest than before on an annual basis. The other co-op was also able to put a significant amount into its reserves by going from a 25- to a 30-year loan amortization.

Timing is everything. With both buildings we said, “Your prepayment penalties have been going down because of the length of time you have left on the loan, so it may make sense to refinance now based on the low rates.” Then rates started to rise, and to their credit, the boards decided to get moving. Even so, by the time we were in a position to really lock things in, interest rates had risen by a point or more. The takeaway here is that if a deal makes sense early, it’s like a bird in the hand because it’s worth two in the bush. Don’t wait until loans come due. Act now.