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Co-op Refinancing: The Less-Obvious Factors That Affect Your Interest Rate

Patrick B. Niland in Board Operations on December 27, 2012

New York City

Dec. 27, 2012

The size of the reserve fund could suggest how well a building might handle an unexpected expense, and the lack of one could indicate a hand-to-mouth operating style. A solid credit rating shows that the co-op regularly pays its bills in a timely manner. A cap on the number of non-owner-occupied apartments is good, as is enough shareholder turnover to give lenders an idea of units' market value.

Co-ops with higher debt loads but better scores on all of these other parameters would be viewed more favorably by most lenders than co-ops with lower debt but a weaker financial picture. And aside from all these factors, there's the physical profile of the building to consider.

Let's Get Physical

The physical profile is as important as any other aspect when it comes loan underwriting. Are all of the co-op's major building systems — the roof, façades, windows, heating plant, plumbing, and electric service — new or in good repair? If part of the new loan will be used to fund capital improvements, has the co-op board consulted an engineer to evaluate the plan, materials, contractor, and estimated cost? Is there an underground fuel storage tank on the property and, if so, has it been pressure-tested and certified as leak-free?

Does the building have a good selection of apartment sizes and floor plans? Does the building offer other amenities like a laundry, garage, health club or storage? Buildings that have been well maintained are more attractive to lenders as collateral for a new loan.


Another factor is volatility in the financial markets. Today, most co-op underlying mortgage loans are priced using a formula based on the 10-year U.S. Treasury rate. This interest rate, which reflects the return paid by the U.S. government to borrow money from investors, has become a benchmark for all sorts of financial instruments. When making a new loan, lenders set the interest rate by adding a “spread,” or margin, to the current 10-year treasury rate.

What many people don't realize is that both the 10-year Treasury rate and the spread change from minute to minute in response to trading in the financial markets. So, even if your building and an identical building had loans priced on the same day, each could receive a different interest rate.

Finally, loan size matters. Most investors in the mortgage market are like warehouse stores such as Sam's or Costco: They buy in bulk and pass those savings on to their customers. That's why bigger loans — those over $5 or $10 million — usually receive lower (and, sometimes, depending on the quality of the borrower, much lower) interest rates than smaller loans.

Throughout all this, you can take comfort in the fact that current rates are so low chances are your building will get a great rate. 


Patrick B. Niland, a mortgage broker, is the principal of First Funding of New York.

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