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When interest rates are falling, take advantage of the dip to
refinance your existing business debt and put more dollars in your
pocket.
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.
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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 percent. 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. |
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 percent. When rates dropped below 8 percent, 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 percent to pay
off the 10 percent loan on the office building.
The savings —
3 percent of $1 million — equaled $30,000 a year. The
doctor’s loan origination fee and other closing costs came to
roughly 2 and 1/2 points or $25,000. In the first few years,
the physician more than recouped these charges from his interest
savings.
Indeed, considering the
25-year term of the new mortgage, the effective annual cost of the
refinancing was only $1,000 per year.
So 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 is not the case. Try asking for the London Inter
Bank Offered Rates (LIBOR), which are often cheaper than prime rates
for a bigger customer with good credit.
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