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Our small 20-unit co-op building is in the process of refinancing the underlying mortgage (loan amt ~$580K) and we have 2 loan options and the board is deciding what is the best path to take.
We found that many banks don't even want to work with us b/c of our small loan size. We have culled it down to either A) a 15-year fixed or B) a lower rate 10-year fixed amortized over 30 years, requiring refinancing after 10 years. Note with the 10-over-30 we risk limited options of who will refinance with us in 10 years, and what that rate might be.
Naturally the benefit of having the mortgage paid off in full after 15 years is conceptually a good thing for the *future* of the building, but I question how many of our current shareholders will be here in 15 years to realize the benefit of having no mortgage (ie, lower maintenance)? Hard to say, but at best maybe a third of the shareholders. The estimated benefit would be only a 20-25% reduction in the maintenance -- after 15 years.
On the flip side, going with the 10-over-30 scenario would lower everyone's maintenance immediately, and for the next 10 years.
The "delta" between the two rates is approx $925/year per shareholder -- which certainly adds up over 10 years.
So, is it "normal" for a co-op to always have an underlying mortgage, since we are essentially a not-for-profit corporation, or should we try hard to pay it off in 15 years -- at the expense of our shareholders' pockets? I don't want to punish the current shareholders just to achieve a goal that mildly benefits the building years down the line. We want to make the responsible decision! Appreciative for any advice.
I've got a similarly small mortgage for our coop corp to refi in few years. My question is who did you get two proposals from and what conditions/terms do the proposals have regarding your ability to prepay them before maturity (and costs associated). if the prepay terms differ alot that could be a big factor in my decision.
Who did your proposals come from? I've got a similar situation in a few years. Also do the proposals have the same call protection?
thanks
You don't say what you're currently paying monthly on your existing mortgage. For 580,000 @ 4.5%, you would have a $6000 monthly payment to pay it off in 10 years. Mortgage rates are low, I would lock in the low rates for either 10 or 15 year full amortization. Mortgage payments, property taxes, fuel and salaries are the big budget items. Can't do much about the other 3 in a significant way. This becomes a selling point to buyers as well, a reduction in monthly carrying charges, even if it is 10 years away.
Re: the Fannie Mae 10% maintenance reserves, I think that only applies to condo's.
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Hi,
It is critical that you pay it down. If you building is of any age, then the mortgage serves as a capital well for capital repairs and improvements. As we have seen, building values do not always rise. And the building components will wear out - even recently replaced ones. If you don’t pay down the mortgage, then you risk not having enough surplus value from which to borrow should you need to in a downturn in the economy. And don’t forget inflation and new regulations – capital repairs will nearly always cost more in the future then now.
Even more challenging is the need to raise reserves while paying down the mortgage. New regulations by Freddie and Fannie mean that they may not guarantee unit mortgages to prospective buyers if you fail to place 10% of your maintenance into reserves.
I would go for the low rate loan. Use some of the savings on the interest rate to increase reserves. You might even save up enough to pay off a portion of the remaining balance after the 10 year period is up.
Good luck!
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