Interest Rate Hikes Are Hitting Co-op Mortgage Refinancing

When the Federal Reserve raised its benchmark interest rate by three-quarters of a percentage point on June 15, it was the third hike of the year and the largest since 1994. The goal was to slow inflation, which is galloping at its fastest pace in four decades.

For New York City co-op boards, the string of hikes in interest rates has begun to pinch what for years has been the preferred way to pay for capital projects and other rising costs: refinancing the co-op’s underlying mortgage at an attractive interest rate, with a line of credit as a backup for unanticipated expenses. Those days of cheap money are vanishing fast.

“Co-ops are going to be hit, especially the middle-class co-ops we manage in Queens,” says Kumar Shingwani, the vice president at the property management company First Management. “Rates are changing so rapidly.”

To illustrate this new volatility, Shingwani cites an 84-unit landmarked co-op he manages in Jackson Heights, Queens, that has negotiated a refinancing of its underlying mortgage with National Cooperative Bank. The new $2 million loan, with a $500,000 line of credit, carries a 4.65% interest rate — up sharply from the previous loan’s rate of 3.53%. The co-op board has until Aug. 17, three days before the closing deadline, to act on the offer.

Shingwani’s advice to the board? “I would jump now,” he says. “From what I’m hearing from bankers and brokers, rates could pass 5% in the next few weeks.”

Pat Niland, president of the mortgage brokerage First Funding of New York, agrees that interest rates offered by banks to co-ops could top 5% in the near future, but he advises boards, somewhat counterintuitively, not to become paralyzed by rising interest rates.

“I tell co-op boards that if you need the money now, forget about interest rates,” Niland says. “You can’t guess what the markets are going to do. It’s fool’s folly. Get your professionals together — your property manager, lawyer, accountant and mortgage broker, if you have one — and discuss what you need, and make sure the prepayment penalty makes sense. Get all your ducks in a row, then go to market.”

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Niland cites a Queens co-op board he has been working with for the past two years. When the board started shopping for a mortgage two years ago, it could have locked in an interest rate under 3%. “But they couldn’t make up their mind,” Niland says. “They diddled around, and now the best rate they can get is around 5%.”

Niland adds that the 10-year U.S. Treasury note — another bar banks use in pegging interest rates on loans — recently dropped from a historic high of 3.49% to 2.82%. “That,” Niland says, “indicates that a lot of people are getting comfortable with the idea that inflation will be controlled and that the Federal Reserve knows what they’re doing.”

Mindy Goldstein, senior vice president at National Cooperative Bank, which pegs its co-op loans to the 10-year Treasury note, says some of her co-op clients are waiting to refinance. “Others aren’t waiting because they’re afraid rates could go even higher,” she says. “If you need the money, what’s the point in waiting?”

Even if inflation slows and interest rates come back down, Shingwani, the property manager, believes that co-op boards will continue to face financial challenges on numerous fronts. “Brokers tell me the world economy is pushing all this,” he says. “It’s not only interest rates and the cost of gasoline that are being affected, it’s the cost of labor under the new 32BJ union contract. It’s the cost of insurance and energy. Property taxes are jumping. Most co-ops are 70, 80 years old, and the infrastructure has to be upgraded. Eventually, the Climate Mobilization Act is going to cost us.”

One thing remains virtually certain: refinancing the underlying mortgage and securing a line of credit will continue to be a life-line for many co-ops. The looming question is: how much will that life-line cost?