President, Einsidler Management
Know Your Long-Term Financing Needs
Setting the Scene
Boards come in all sizes, shapes, and fiscal leanings. But all need to decide whether to refinance their mortgage and (a) take a significant sum of money from the proceeds for future capital work, or (b) just take what they need in the short-term.
Following the Action
One of the factors in the decision is how much they have left on their current mortgage and whether they have an interest-only mortgage that they are going to be refinancing, or they’ve been amortizing the mortgage over the last 8, 9, or almost 10 years. Most loans are 10 years, and they’re balloon mortgages. I’ve found that boards that have chosen to do long-term, self-liquidating mortgages always ended up refinancing those mortgages early because they needed more funds for future capital improvements.
Most of the 10-year loans carry some sort of prepayment penalty. You should consider that, while also knowing what your financial long- and short-term needs might be. The way to do that is to go out and get some estimates on long-term capital improvements. Although it can’t be predicted precisely, if you can go out and get actual bids and add a little bit for inflation each year, you’ll have a rough idea of what you’ll need when they come due. There are always surprises that can come up. The choices the board made will affect the long-term financial status of the reserve fund. By taking a large sum initially, they know they have the money in reserve. They can get interest on that money until they need to use it. If they choose to budget the savings, they have to be very disciplined. If there are significant savings, you could put so much a year into the budget as a line item, and then put that money away each month.
Doing It Right
Planning is key. We set up a mortgage reduction fund based on the differential in rates that may happen between now and 10 years from now. If they amortize the loan, they’re not stuck with looking to refinance the whole balance plus the closing costs. You should do your homework, know your financial needs, and stay on top of the situation. If used properly, refinancing can be the greatest tool for the long-term financial health of your property.