Author Topic: What loan rate/term would you pick?  (Read 1493 times)

Weedy Acres

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What loan rate/term would you pick?
« on: May 19, 2016, 04:26:25 PM »
I'm building a commercial building for my business.  Net loan will be ~$1 million.
$200K will be a 2.75% city loan
40% of the remainder ($320K) will be an SBA 504 loan at 4.3%, fixed for 20 years.
60% of the remainder ($480K) will be a bank loan.

Bank options:
4.95% 20 year fixed
4.5% 10 year fixed
4.65% 5 year fixed
4.15% 3 year fixed
All amortize over 20 years with balloons/resets at the end of the fixed rate period.

Which of the bank options would you pick and why?

Enough

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Re: What loan rate/term would you pick?
« Reply #1 on: May 20, 2016, 08:32:44 AM »
4.95% 20yr fixed.  The stability and knowing that your rate isnt going to jump is well worth the extra 0.8-0.45% interest.

RWD

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Re: What loan rate/term would you pick?
« Reply #2 on: May 20, 2016, 08:38:01 AM »
4.95% 20yr fixed.  The stability and knowing that your rate isnt going to jump is well worth the extra 0.8-0.45% interest.
But the other three options are all fixed loans as well, so that's not the only one where the rate won't jump...

Edit: I didn't read carefully enough. If paid off during the fixed period then the rate won't jump.
« Last Edit: May 20, 2016, 10:52:29 AM by RWD »

Rufus.T.Firefly

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Re: What loan rate/term would you pick?
« Reply #3 on: May 20, 2016, 08:40:23 AM »
4.95% 20yr fixed.  The stability and knowing that your rate isnt going to jump is well worth the extra 0.8-0.45% interest.

+1

With the other options, when the loan balloons in 3 years or 5 years, the lender will charge you the going market rate. If the interest rate has jumped, you will be locked into a higher rate. (I am making some assumptions about the fine print of your loan based on my experience with commercial lending)

It's not even close for me. Commercial lenders often charge much higher rates for 20yr fixed. Some won't even offer it. Your downside is minimal (rates cannot go down much from today), your upside is substantial (rates can go up a lot from today).


Weedy Acres

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Re: What loan rate/term would you pick?
« Reply #4 on: May 20, 2016, 09:55:21 AM »
Those are pretty quick and emphatic answers.  Thanks!  Good point about now being pretty much the bottom (for the SBA loan, this is the lowest it's been in 10 years, except for 2012 Q4).  Do commercial lending rates bounce around as much as the SBA rates do?

The banker told me they don't typically do fixed rate loans out that far (and swore me to confidentiality).  It will come with some sort of pre-payment penalty/prohibition. 

I ran some what-ifs between the 10- and 20-year fixed options. 

A: Rates stay flat:  20 year costs me $28K more in interest
B: Rates are 6.15% in 10 years:  20 year and 10 year are equal
C: Rates are 7% in 10 years: 10 year costs me $15K more in interest
D: Rates are 8% in 10 years: 10 year costs me $34K more in

Hmmm, so now let me consult my crystal ball on where rates will be.... :-/

Does it change your recommendation if I intend/desire to pay it off more quickly?

Rufus.T.Firefly

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Re: What loan rate/term would you pick?
« Reply #5 on: May 20, 2016, 02:13:56 PM »
I'm not a banker, but here is my basic knowledge of SBA. The interest rate may be different from a conventional loan structure by a little, but there is no difference in the fact that a banking institution is making the loan. The SBA guarantees a portion of the loan to the bank - it does not actually make loans themselves. This is designed to encourage banks to make *risky* small business loans that they otherwise would not at normal interest rates.

Commercial rates almost always track +2% above the home mortgage rate. Right now you can get a low 3.5% home loan so 5% sounds about right. In fact, its a little better than I would have expected.

I think the 10-year option is not a bad option. Here is the deciding factor that would make me pick the 10 year: do you plan to pay off the loan in the 10-year period or refinance to stretch out the payments for a full 20 years? If you plan to pay it off by the end of 10 years, you will obviously save the money. I would stay away from the 3 and 5 year choices. The Fed has been eyeing rate hikes for years now - it will happen sooner or late. I don't have a crystal ball either, but I would be surprised if we're still at the current Fed rate in 5 years.

As a side note to your cost calculations - the banks have the right usually upon calling the note at the end of the period to re-appraise the property and re-assess the loan. And they have the right to turn away the refinancing. That could be a lot of hassle and some extra cost.