Refinance Debts to Trim Interest Costs

Posted on Monday, July 30, 2018

When interest rates are falling, take advantage of the dip to refinance your existing business debt and put more dollars in your pocket.

A rule of thumb: If you own mortgaged real estate or other property that you expect to keep for at least two years, refinance when rates drop by 2%. That way, you can reduce your monthly mortgage payments. Depending on the number of years left on the loan, you could end up saving thousands of dollars.

Of course, you can check to see if your bank can trim the interest rate on your mortgage by two or more percentage points. The loan origination fee and other closing costs may work out to a few points, but you might be able to recoup this amount in less than a year because of the interest rate savings.

But don't stop there.

If cash flow isn't a problem for your company, consider a different arrangement. Instead of reducing your monthly payments, refinance to reduce the term of your mortgage. Because of the lower interest rate, you may pay off your mortgage faster while keeping the same monthly payments.

Sometimes, businesses can profit by getting creative. For example, one medical group practice financed its own office building several years ago with a $1 million mortgage at 10%. When rates dropped below 8%, they explored some refinancing options.

One of the partners in the practice owned a home with more than $1 million in equity. The bank was more than happy to finance the doctor's residence. The doctor used the $1 million he borrowed on his home at 7% to pay off the 10% loan on the office building.

The savings — 3% of $1 million — equaled $30,000 a year. The doctor's loan origination fee and other closing costs came to roughly 2 1/2 points or $25,000. In the first few years, the physician more than recouped these charges from his interest savings.

Considering the 25-year term of the new mortgage, the effective annual cost of the refinancing was only $1,000 per year.

So take another look at all your credit costs on buildings, machinery, equipment, inventory, accounts receivable and lines of credit to determine if you can save by refinancing.

Review all loan documents, as well as rates and collateral reported in the footnotes to your financial statements. Perhaps you can negotiate terms that reduce the collateral if you make loan payments promptly for a certain period.

Question the rates your bank offers you. Many people think that prime rates are for prime customers only. This isn't the case. Try asking for the London Interbank Offered Rates (LIBOR), which are often cheaper than prime rates for a bigger customer with good credit. LIBOR is the rate which banks charge each other for loans.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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