How do you decide if refinancing makes sense? The answer depends on many factors, including; tax bracket, how much debt you need to restructure, the length of time you plan to keep your wash, and refinancing costs.
Here’s How:
- With a new loan, you may be charged a penalty for paying off your original loan early. So check first.
- The total expense for refinancing depends on settlement costs, interest rate, points, and other fees required to obtain a loan.
- Talk to some lenders to determine the available rates and the costs associated with refinancing (appraisals, attorney’s fees, points). Then determine what your new payment would be if you refinanced.
- You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings).
- Shopping for points, as well as interest rates, may save you money. As a rule of thumb, each point adds about one-eighth to one-quarter of one percent to the interest rate the lender is offering.
- To decide what combination of rate and points is best for you, balance the amount you can pay up front with the amount you can pay monthly.
- The less time that you keep the loan, the more expensive points become. If staying with your wash for a long time, it may be worthwhile to pay additional points to obtain a lower interest rate.
- Some lenders offer to finance points so that you do not have to pay them up front. Points are added to the balance, and you pay a finance charge on them meaning increased monthly payments.
- Settlement costs typically include fees for the loan application, title search, appraisal, loan origination, credit check, lawyer’s services, and environmental audits (phase I or phase II). You also may be required to pay recording fees or transfer taxes.
- With a lower interest rate, you will have less to deduct on you income tax return. That may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage.
- You might consider a 10-, 15-, 20-, or 25+-year, fixed-rate adjustable mortgage. Payments are higher, but you pay substantially less interest over the life of the loan and build equity more quickly.
- You do not have to refinance your mortgage with the same lender that provided your original loan. However, to keep your business, some lenders may offer customers incentives of lower interest.
- If you decide on a particular lender, and do not want to let the interest rate “float” until closing, get a written statement guaranteeing the interest rate and points that you will pay at closing.
- The lender must give you a written statement of the costs and terms of the financing before you become legally obligated for the loan.
What’s Needed:
Information you will need to make available to your lender:
- Fiscal year end business financial statements for prior (3) three years
- Business federal tax returns for three prior years, including all supporting schedules and statements
- Interim business financial statement (year-to-date) – within 30 days of application date
- Business Debt Schedule, as of the same date as the interim financial statement
- Aging of accounts receivable & accounts payable (corresponding to dates of interim financial statements)
- Business Plan
- Month-to-month projections covering any interim period until year end plus two full fiscal years including the assumptions that the projections were based upon, and a pro forma business balance sheet on new businesses.
- Personal Financial Statement for all owner(s) with 20% or more ownership interest
- Personal Cash Flow Statement
- Personal Federal Tax returns for three prior years, including all supporting schedules and statements
- Statement of Personal History
Tips:
1. The ultimate amount you may save depends on many factors, including your total refinancing costs, whether you sell your wash in the near future, and the effects of refinancing on your taxes.
2. The old rule of thumb used to be “don’t refinance unless saving 2% on interest”. Zero points and low-cost refinancing can negate that theory.
3. When you apply for a mortgage, some lenders require you to pay a special non-refundable charge to cover the costs of processing.
Refinancing correctly requires lots of time and patience, but the outcome can get the desired results – more money in your pocket.
Norris Streetman is a licensed commercial real estate broker. His only business is buying and selling car washes.
norrisstreetman@carwashforsale.net
(918) 313-8309 |