As summer temperatures cool down, the refinancing discussions at many co-ops are heating up. With rates at levels not seen since the early 1960s, refinancing underlying mortgages will be a central topic for many boards this fall.
A key element in this discussion will be the cost of a new loan. Closing costs are substantial, so co-op boards need a clear understanding of every cost. "Closing in on Closing Costs" provides a quick overview of the main expenses involved in the refinancing process and it offers guidelines for each expense, as well as some tips on saving money.
I also want to draw your attention to the "Mortgage Masters" program on Page 4. I'm very excited by the overwhelmingly positive comments I've received from those who've taken the course. "Very informative-and very professional," remarked a recent graduate.
I extend an open invitation to other management firms to sign up. The course is free and helps managing agents better understand the complicated process of refinancing an underlying mortgage.
Once again, thank you for reading Co-op Financing Quarterly.
I hope your fall is both pleasant and colorful!
Patrick B. Niland
©1998 by Patrick B. Niland
As interest rates have plummeted, your board probably has been thinking more seriously about refinancing your building's underlying mortgage. Since refinancing is such a complex and time-consuming process, everyone's first question is: "How much will it cost?" The answer to this question depends on the unique circumstances of your co-op.
However, closing costs-the actual out-of-pocket expense of finding, processing, and closing a new underlying mortgage-often play the largest role in determining whether a co-op enters the market before its existing loan comes due. Some refinancing costs depend on the size of your new loan, and some do not; some are fixed, while others are negotiable. Therefore, before you begin, it pays to know what's involved.
Refinancing costs fall into three main categories: "get ready" costs, "up front" expenses, and "actual" closing costs. "Get ready" costs include fees paid to your attorney, accountant, and managing agent for gathering and analyzing all of your co-op's records in preparation for the refinancing effort. Never skimp on these activities. Being well prepared before contacting lenders will pay big dividends later on.
"Up front" expenses include any amounts which lenders collect in advance as part of the application and underwriting process. For example:
Once your loan application has been approved, a commitment letter will be issued. Most commitment letters include a list of documents and other information that must be supplied prior to closing. Virtually all of this documentation will be assembled or prepared by the co-op's attorney.
Once all of that legal work has been completed, a closing will be scheduled. At the closing, the new lender will pay off the outstanding balance of any existing loan, as well as the following expenses:
Lastly, most lenders will require that your co-op's property insurance be prepaid for the entire year after closing. They also will collect one-twelfth of the annual total of your co-op's real estate taxes and water and sewer charges for every month that has elapsed since these items were last paid. They do this to establish an escrow account to which they will add an additional one-twelfth every month. This escrow account will allow the lender to continue to pay all of these items directly when they next come due.
As you can see, refinancing an underlying mortgage is a very expensive process. Therefore, it should not be undertaken lightly nor without extensive preparation and involvement by all the co-op's professional advisors. Nevertheless, a refinancing can produce significant long-term savings if the process is completed properly.
Since closing costs add up quickly, it pays to get a detailed estimate before applying to any lender. A co-op's professional advisors (attorney, accountant, managing agent, and mortgage broker) can provide these estimates as well as other important information that will help the board make an educated decision about when - or whether - to refinance.
|Building Name or
|SANFORD HOUSE 15 years
A four-story building with 16
units that was converted in 1990.
|30 EAST 21st STREET
A nine-story building with 16 units that was converted in 1982.
|BAY STREET TOWNHOMES
A former warehouse with 17 loft apartments that was converted in 1984.
|Staten Island||$900,000||15 years||8.75%|
|215 WEST 78th STREET
A 10-story building with 39 units that was converted in 1979.
Q. Our board currently is having a major disagreement over the relative benefits of sticking with our current loan until maturity versus refinancing at today's lower rates. We've been at a complete standstill for three months but need to get the process moving again. What can we do?
A. Any co-op contemplating the refinancing of its existing mortgage should first consult all of its professional advisors: managing agent, attorney, and accountant. While each of these advisors will provide important information to the board, the co-op's accountant is the best person to compare the economic benefits of refinancing to the related costs.
If you have not done so already, convene a meeting of all of your
professionals to discuss whether refinancing is right for you. You also might invite a
mortgage broker to this meeting to give you the latest market information.
If you have a question for "Refi Whys and Wherefores," please e-mail it to firstname.lastname@example.org, fax it to the publisher at (716) 473-6305, or snail-mail it to our office.