There are three primary motivations for organizations to consider refinancing their loan.
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.
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.
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.
A comparison of these two options is illustrated below.
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.
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.
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