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Investor Glossary
2 min read
by Jeff Hamann

Rate-and-Term Refinance in Industrial Real Estate

Rate-and-term refinancing loans have many uses, from assisting borrowers in lowering monthly debt service costs to paying off a loan earlier or later.

In this article:
  1. What Is a Rate-and-Term Refinance?
  2. Benefits of a Rate-and-Term Refinance
  3. Lower Interest Rates
  4. Longer, Shorter Loan Terms
  5. Additional Benefits
  6. Related Questions
  7. Get Financing
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What Is a Rate-and-Term Refinance?

A rate-and-term refinance occurs when a borrower takes a loan of equal or equivalent principal value to an existing mortgage but with different loan terms. This can include refinancing to take advantage of lower interest rates or a longer term or amortization period. There are many reasons to look into a rate-and-term refinance for your commercial real estate property. We outline several possibilities below.

Benefits of a Rate-and-Term Refinance

Lower Interest Rates

Using a rate-and-term refinancing loan can be an effective way to lower the cost of debt service on your commercial real estate assets.

If you have a 10-year loan on a distribution center with an interest rate locked in at, say, 5%, but interest rates drop, executing a rate-and-term refinance could save you significant cash. Even a drop of only a few basis points can make a major difference to your property’s financials, particularly over a lengthy loan term.

Even if interest rates hold steady, an increase in the creditworthiness of a borrower may also be enough to secure a lower rate via a more competitive interest rate spread from lenders.

Longer, Shorter Loan Terms

Rate-and-term refinancing packages can also be used to lengthen — or shorten — a loan term. There are several reasons a borrower may wish to change a loan’s term. A longer term may lead to lower, more manageable monthly payments.

On the other hand, a shorter loan term may lead to higher monthly payments — unless there are significant changes in the note’s interest rate — but this could be a boon to borrowers seeking to pay down debt on an asset in a faster manner and by paying less interest over the life of a loan.

Additional Benefits

While there are many other reasons to pursue a rate-and-term refinance, most tie into the benefits of either paying a mortgage off sooner or lowering the costs of debt service. Another benefit can be realized when refinancing a variable-rate with a fixed-rate loan. While the new loan may have a higher interest rate than the previous, the static nature of a fixed-interest loan may be beneficial, particularly during times of rapidly increasing rates.

Related Questions

What is a rate-and-term refinance in industrial real estate?

A rate-and-term refinance is a type of loan that allows you to refinance your existing industrial real estate loan without taking out additional cash. This type of loan is typically used to lower your interest rate or extend the term of your loan. It can also be used to switch from an adjustable rate loan to a fixed rate loan.

At Commercial Real Estate Loans, we offer a wide array of bridge loan programs for value-add industrial opportunities. Our bridge loan programs offer temporary and aggressive financing tools to prepare the property for a seamless transition to permanent financing or the sale of the property.

If you're interested in refinancing your industrial real estate loan, our bridge loan programs can help you access the capital you need to make your investment play.

What are the benefits of a rate-and-term refinance in industrial real estate?

A rate-and-term refinance in industrial real estate can provide several benefits, such as:

  • Lower interest rates, which can save you money over the life of the loan.
  • Longer loan terms, which can reduce your monthly debt service payments.
  • Access to extra capital to make improvements to the property.
  • The ability to diversify your portfolio by investing in other properties.

For more information, please see this article and this article.

What are the risks associated with a rate-and-term refinance in industrial real estate?

Rate-and-term refinances in industrial real estate can be a great way to lower your monthly payments and free up capital for other investments. However, there are some risks associated with this type of financing that you should be aware of before deciding if it is right for your situation.

One major risk is that if the value of your property decreases, you could find yourself underwater on your loan – owing more than the property is worth. Additionally, if the market rate for interest rates increases, you may not be able to refinance your loan at a lower rate. Finally, if you are unable to make your payments, you could face foreclosure.

Before taking out a rate-and-term refinance, be sure to speak with a qualified commercial real estate broker to discuss all of the risks and benefits associated with this type of financing.

What are the requirements for a rate-and-term refinance in industrial real estate?

In order to qualify for a rate-and-term refinance in industrial real estate, you must have at least 25% of equity in the property. The loan-to-value ratio (LTV) cannot typically exceed 75%. You will need to prepare recent W-2 forms or pay stubs, current lease agreements for the property, and the most recent two years worth of personal and business tax returns. The lender will also want to check that the borrower is not taking out more debt than it can handle, so the debt-to-income ratio (DTI) should be around 36% or lower, but under no circumstances should it be higher than 50%. Additionally, closing on the loan will come with additional costs, and refinancing is no different. Refinancing a loan typically costs around $5,000, however, this fee usually varies depending on the size of the loan and the location of the property.

For more information, please visit this page and this page.

What are the costs associated with a rate-and-term refinance in industrial real estate?

The costs associated with a rate-and-term refinance in industrial real estate will vary depending on the size of the loan and the location of the property. Generally, refinancing a loan typically costs around $5,000. Additionally, you must have at least 25% of equity in the property and the loan-to-value ratio (LTV) cannot typically exceed 75%. To qualify for refinancing, you will need to prepare recent W-2 forms or pay stubs, current lease agreements for the property, and the most recent two years worth of personal and business tax returns. Other documents needed might include asset information, title insurance, and a property appraisal documentation. The lender will also want to check that the borrower is not taking out more debt than it can handle, so the debt-to-income ratio (DTI) should be around 36% or lower, but under no circumstances should it be higher than 50%.

For more information, please visit this article and this article.

What are the alternatives to a rate-and-term refinance in industrial real estate?

The alternatives to a rate-and-term refinance in industrial real estate are cash-out refinances and partially amortizing loans. A cash-out refinance allows you to access capital to make renovations and improvements, or to invest in other properties. A partially amortizing loan may be the logical choice for any borrower with an upcoming balloon payment. This is the case for CMBS loans, hard money loans, construction loans, and bridge financing, but it can also be common for many types of bank loans and most Fannie Mae or Freddie Mac multifamily loan products. 4 Reasons to Refinance Your Office Loan Today and Refinancing Commercial Real Estate Loans provide more information on refinancing options.

In this article:
  1. What Is a Rate-and-Term Refinance?
  2. Benefits of a Rate-and-Term Refinance
  3. Lower Interest Rates
  4. Longer, Shorter Loan Terms
  5. Additional Benefits
  6. Related Questions
  7. Get Financing

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