Navigating a Mortgage Refinance

With interest rates rising — they’ve now doubled to around 6% — and lenders scrutinizing everything more closely, it’s becoming harder for co-op boards to refinance their underlying mortgages. But there are ways to navigate today’s rough lending landscape. 

Don’t fixate on the rate. “Quit focusing on interest rates — what I call rate myopia — because they’re going to do what they’re going to do,” advises Pat Niland, the president of the mortgage brokerage First Funding of New York. Instead, he says, boards should pay attention to how lenders’ reviews of loan applications have become more stringent. “They’re taking a hard look at unsold shares and investor units,” he says. “They don’t like sublets. They’re making sure insurance includes full building replacement coverage. Virtually all lenders require a reserve account that’s deposited with them, and some lenders require that it’s at least $1,000 per unit. They’re looking to see if the co-op is being run the way it should be run because they don’t want to lend to a co-op that can get into financial trouble.”

Pay down the debt. Peter von Simson, the president of New Bedford Management, advises his co-op board clients that while interest-only loans that don’t pay down the debt may be attractive because they help keep monthly maintenance low, they’re rarely a good idea. When interest rates were low, “some boards thought there was no such thing as too much debt, but smart boards realized that one day interest rates are going to go against you,” he says. “As a board member and a fiduciary, you’re not just making a decision for today but for the long-term financial health of the building.”

But Niland says that interest-only loans can be useful under very specific conditions. If, for instance, a co-op with a heavy debt load needs money to pay for urgent capital projects when interest rates are rising, it might make sense to structure a loan with two or three years of interest-only payments, followed by partial amortization. “That gives the board a window,” he says, “when they can gradually raise maintenance to the point where it can cover the amortization payments.”

Get your house in order. Time will always be money, but it’s worth even more when interest rates are rising. “It’s particularly important now to be prepared,” Niland says. “Before you enter the market, have your attorney look through your existing loan and also find out if there are any arrears, litigation or building violations. You can’t proceed until you solve your problems.”

Your accountant, he adds, should review the financials and make sure that maintenance covers operating expenses and debt service, with a little left over. Lenders object when assessments are used to cover operating costs. “When you’re in a rising-rate environment,” Niland says, “you don’t want any delays in closing the loan. And remember, lenders are getting much tougher. They’re paying attention to everything.”