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When To Consider Refinancing

There are three primary motivations for organizations to consider refinancing their loan.

 
  • Secure a loan with more favorable terms
  • Reduce the risk associated with increasing interest rates
  • They have outgrown the relationship with their current lender


Motivation # 1 - Clients Seeking More Favorable Terms

 

When a bank or denominational lender extends a loan, their actual commitment is usually limited to five or seven years. At that point, the borrower must go through a formal renewal process. The two examples below illustrate the implications of going through a renewal process verses refinancing.

 
  • Examples 1-A and 1-B illustrate payments associated with a Renewal process.
  • Examples 2-A and 2-B illustrate payments associated with a Refinance process.
 

Example 1-A: Renewal with no additional principle reductions applied

 



Example 1-B: Renewal with an additional $40,000/yr applied to principle, $200,000 in total

 

Examples 1-A and 1-B show what a payment would potentially look like five years into a $1,750,000 loan. This model presumes an increase in rate at the time of renewal with the balance being amortized over the remaining 15 years of the original 20 year commitment.



Example 2-A: Refinance with no additional principle reductions applied

 



Example 2-B: Refinance with an additional $40,000/yr applied to principle, $200,000 in total

 

 

Examples 2-A and 2-B show what a payment would potentially look like when the remaining balance is refinanced five years into a $1,750,000 loan. This model presumes an increase in interest rate of 1% at the time of the Refinance. This also shows the loan balance being amortized over a new 20 year term.

 

Organizations approach these options in different ways. Some organizations have the mindset of paying the loan off as soon as possible. In those cases, refinancing the loan to reflect a new 20 year amortization would work against their philosophy of how to manage debt. Other organizations will take a different approach. Instead of being primarily concerned with paying off debt, they are focused on managing their month-to-month cash flow. Refinancing the principle balance to a new 20 year structure would free up money that could be reallocated to other priorities and/or ministries. Either is a valid option.



Motivation # 2 - Clients Seeking Protection from the Possibility of Increasing Interest Rates

 

This is where bond financing structures have a significant advantage over bank and denominational loan structures. Once the bonds are issued, the rates are fixed for the term of the bond with little or no requirements to go through a renewal and re-qualification process.

 

When the economy is such that rates are low and expected to increase in the coming years, borrowers with bank or denominational financing have two primary options.

 
  • Option 1 – Do nothing and see what happens at the time of renewal.
  • Option 2 – Refinance to take advantage of existing rates for a longer period of time
 

A comparison of these two options is illustrated below.

 
  • Example 3-A illustrates payments associated with Option 1 (same as Example 1-A)
  • Example 3-B illustrates a refinance that stays in line with the original 20 year term/li>
  • Example 3-C illustrates a refinance that does extend the loan to a new 20 year term.
 

Note: The following examples illustrate comparisons based on an interest rate increase of 1% at the time of renewal. Market conditions will dictate what that increase or decrease would actually be.



Example 3-A: Waiting to see what happens when the loan renews

 

 

The total mortgage expense under Example 3-A for the first eight years is $1,184,890



Example 3-B – Refinancing after 3-years and keeping the original 20 year amortization schedule

 

 

The total mortgage expense under Example 3-B for the first eight years is $1,156,146. This represents a total savings of $28,744 when compared to Example 3-A.



Example 3-C – Refinancing after 3-years and amortizing to a new 20 year term

 

 

The total mortgage expense under Example 3-C for the first eight years is $1,091,367. This represents a total savings of $93,523 when compared to Example 3-A and $64,779 when compared to Example 3-B.

 

The financial savings is an important aspect to consider. Some organizations will also value knowing what their payment will be for a longer period of time.



Motivation # 3: Clients That Have Outgrown Their Current Lender Relationship

 

Many smaller banks actively look to help churches and religious organizations with their financing needs. Over time, however, as a ministry grows their funding needs will increase. In these cases, it is not uncommon for the ministry to need a loan structure that exceeds their current lenders capacity. This scenario would require the organization to refinance their loan with a lender that allows for their continued growth.

 

Another example of a ministry outgrowing their current lender’s capacity may have to do with the need to incorporate cash management services to help manage their day-to-day cash flow requirements. Many smaller banks do not have access to the various commercial banking products that can facilitate better stewardship and accountability in managing their finances. Since most banks require an organization to move their depository relationship as a condition of funding the loan, the borrower has no choice but to refinance to a lending institution that can offer an expanded suite of banking services.

 

Would you like someone to help you evaluate your refinancing options? If so, click here to learn more.