Refinance: Timing and Amount

When it comes to refinancing an underlying mortgage, boards typically wait until their existing loan matures or money is needed for capital improvements. But it's a good idea to start sooner than you think you need to. Very often we encounter borrowers who say they don't know the exact loan amount that they need or how much those future capital improvements will cost. Then there are borrowers who are keeping a close eye on interest rates and waiting to refinance so they can strike when the market is hot.

The lay of the land. But the market isn't hot, so waiting longer is not a wise move. Boards do not need to have all of the answers before they start gathering information related to the refi. Of course, there is some info they need, but we can help them fill in some of the blanks. As mortgage brokers, we can let them know where the market is, what loan products are available and what their prepayment penalty is when paying off their current loan prior to the maturity date. 

It's just better for boards to have that information, and there's no cost to obtaining it. Sometimes we'll work with boards for two years before they're ready to even apply for a loan, and the reason we tell them not to wait until too close to maturity is because there could be unanticipated delays that slow the process.

For example, a violation may come up in the building’s their title report, perhaps an environmental issue. If a co-op has a sponsor or commercial tenants, the board may also need to provide information on all of these other parties, and things don’t always pan out exactly as the board may need them to. So start sooner. You can have that information, and you can time it then on your own schedule. Also, since the cost of borrowing may directly affect which projects the board wants to do or needs to do, it is helpful to have that information to figure out your capital-improvement budgets.

Locking it in. The No. 1 problem that we see is that boards don't know exactly how much they need to borrow. We recently worked with a large Manhattan co-op that had a loan due to mature, and it had several very large capital improvement projects that it needed to address, including facade repairs and some electrical work as well as a number of smaller projects. So it added up to a big cashout.

We found a product that allowed the board to apply for the loan and formally lock the interest rate upfront, but it gave the board the option to alter the loan amounts later in the process. That eliminated the risk of today’s rising-rate environment. It also protected the building’s budget for future debt service and future increases that may be needed and allowed the co-op time to complete its capital plan. So the board didn't have to have all the answers on day one.

Choosing your terms. There are other options boards may not know about. A variety of lenders that we work with have varied loan terms. Most co-ops tend to go with the conventional 10-year mortgage, but there are loan terms ranging anywhere from three years to 30 years. There are also different options for amortization schedules, from full-term to interest-only, to keep payments lower, and there are longer schedules such as a 35 or 40 years. There's a whole host of them, and we've gotten really creative through the years.

We also have two-part products—one that’s interest-only and one that’s fully liquidating, meaning there would be no balance at the end. So if a board doesn't want to burden future owners with paying for a one-time project, it can pay part of the loan down sooner. Every building has its own particular needs, so there’s no off-the-menu quote. 

I should add that we strongly recommend that whatever loan a co-op is taking, it should try to bake in access to funds in the future. An unsecured credit line is a great way to do that, and it doesn't cost much upfront to secure. That said, credit lines are unsecured and often have a floating rate, which is hard to budget around, so they’re only for urgent repairs. 

The bottom line is that co-op boards should rely on a team of trusted advisers—mortgage brokers, accountants and attorneys—and get as much data as they can as early as possible before refinancing their underlying mortgage.