In today's low interest rate environment, refinancing is the top agenda item for many cooperatives. However, while the current interest rates would seem to guarantee a "win-win" situation, a savvy board must take into account more than just low rates when making the decision to refinance. As board members, you need to consider the existing terms of the property's underlying mortgage and closely analyze your co-op's financial security, current monthly costs, and projected capital improvements as you seek the optimal refinancing option.
First and foremost, your board needs to review the terms of your current mortgage. The existing loan may not allow the co-op to refinance and/or prepay its mortgage. If the mortgage terms do permit prepayment, you must then determine if expensive prepayment penalties on the front-end still make refinancing a cost-effective solution. If, after completing careful due-diligence, your board decides that prepayment is a viable option, you can now comfortably explore the different refinancing packages available to you.
If your co-op has an existing underlying mortgage scheduled to mature in the coming months, you're in a strong position to take advantage of the current interest rate environment, particularly since market analysts are projecting that rates may not be this low for another 40 years. In this scenario, banks like National Cooperative Bank may be able to provide a loan package to your cooperative that locks in today's desirable interest rate, but schedules the loan to close up to four months later so it can mature, and your co-op can avoid any prepayment penalty. This term is called "forward commitment" or "early rate lock."
NCB recently worked with the Park City Estates Cooperative on 98th Street in Rego Park, Queens to craft a loan package that would closely meet the community's refinancing objectives. In August 2002, the bank offered the property a loan package that satisfied their goals. The five building, 1,049 unit-cooperative was interested in refinancing to benefit from the advantageous low interest rate environment and also access sufficient funds to underwrite necessary capital improvements.
Unfortunately, its first mortgage was not pre-payable until December 2002. But thanks to the efforts of a loan officer, the property was able to lock in a thrifty 5.55 percent rate on a 10-year, $24.5 million fixed-rate mortgage, while also opening an additional $3 million line of credit to fund the improvement projects. The bank scheduled the closing for December 2002, when the prepayment penalty would lift on its existing $13 million loan, which was pegged at 7.9 percent.