When Should You Take the Refi Plunge?

The managing agent represented a co-op that had waited until the last possible minute to refinance its underlying mortgage. He had warned board members that interest rates would not remain as low as they were much longer, and therefore they should refinance their mortgage now. But the board wanted to avoid the prepayment penalty. So now, with rates about to rise, the manager was rushing to a lawyer’s office to close a just-under-the-wire refinancing. The board’s foot-dragging was going to cost them a sizable amount of money. 

That scenario, as related by a manager who lived through it, illustrates just how agonizing the refinancing of an existing mortgage can be for some co-op boards. It usually entails paying a penalty, which some co-ops find hard to stomach. Those pushing for action sooner rather than later, however, worry that putting off refinancing in order to minimize the size of the penalty could mean missing out on lower interest rates. 

This back-and-forth is fairly predictable, says Harley Seligman, senior vice president at National Cooperative Bank. “The discussion that usually happens is, the board sits down and someone says, ‘We’re going to pay a penalty of X? Why would we do that?’ And someone else says, ‘I’m worried about paying a higher rate!’” 

With rates expected to rise in the coming years, many boards are wrestling with this problem. A more productive approach, say lending experts, is to explore their options. “The idea is not to try to make a perfect decision, or to try to call the exact moment when it’s the perfect time to refinance, but to make the best decision possible with the information available,” says Gregg Winter, president of Winter & Company Commercial Real Estate Finance, which handles refinances. 

The board will first need to be clear on what it is trying to accomplish with a new loan. Are they just looking to save money with a lower interest rate? Many co-ops have already taken advantage of such rates during the past decade, but Seligman says he still gets calls from co-ops looking to get out of loans with rates between 5.5 and 7.5 percent. Rates are currently between 4 and 4.5 percent, higher than a year ago but still at very low levels. 

What generally happens is that the board needs to borrow some additional cash to cover a capital improvement project. If the project can’t wait and isn’t just cosmetic, then that needs to be factored into the decision about how much new debt to take on, Winter says, adding: “There is a cost to deferring maintenance – the project could become more expensive.” 

It may also simply be time to refi because the existing mortgage is nearing the end of its term, which means there will be no penalty to pay. Boards in this position are the lucky ones. They don’t have to agonize over whether now is the right time to take the refi plunge.