Do This One Thing to Save Big on Your Commercial Mortgage

In January 3, 2018

When it comes to smart financial moves, some of the most brilliant personal finance ideas are just as effective for business. One of our favorites? Extra mortgage payments. Even just one extra payment applied to a commercial mortgage each year can make a substantial difference, shaving years of payments off the loan.

This idea is familiar to homeowners, but it doesn’t occur to most business owners and CFO’s to apply the same tactic to their business property loans. Who doesn’t want to save six, seven or eight figures on a commercial mortgage?

The length of a loan is shorter for a business mortgage, typically spanning 20 years instead of 30, but the savings potential works exactly the same through amortization. By paring down the principal, the amount of interest on the loan balance drops. The interest rate is the same, of course, but it’s tallied against a smaller balance on the loan. While this doesn’t improve cash flow immediately, it does long-term by shaving years off the end of the loan.

The loan is paid off earlier.

Calculate potential savings for your specific mortgage using one of the “mortgage payoff calculators” found online. A commercial mortgage payoff calculator can be a bit more useful if you want a balloon payment included in the equation.

Before you automatically assume extra mortgage payments are a great place to funnel extra revenue from a business, consider these details:

1. Are there other areas that might benefit more from the infusion of cash? Do you have other loans that charge higher interest or a line of credit that’s tied up? Paying these down might be more useful. Before you make an extra mortgage payment, it’s important to understand cash flow for your business to ensure this is the best move for your money.

Most bankers are happy to help their customers create an effective, customized strategy for cash flow. Even if you don’t bank at Horizon Community Bank, why not ask?

2. Is your mortgage loan current? Late fees, past due payments and escrow imbalances can redirect funds intended to pay down the balance of a loan. Before making extra payments, ensure the account is current and free of other monetary demands that will prevent the payment from being applied to the principal.

3. Are there penalties for paying the loan off early? Before making any kind of payment changes that deviate from the terms of the contract, savvy borrowers check the paperwork. Are there prepayment penalties, or processing fees that might apply? Does language in the contract address extra payments and how the lender handles them? Is there a certain way the payment should be made to ensure it’s applied to the principal? Spending a few minutes to look over the contract can save a mountain of paperwork and headaches later.

4. Is modifying the loan paperwork necessary, or can you keep the prepayments more casual? Some lenders provide a program allowing mortgage holders to make payments twice a month, rather than once. It sounds attractive as a way to ensure the extra payments are made, but doesn’t always work in the borrower’s favor. Is it in your best interests to commit? Before you make a switch through official channels–meaning a loan documentation change committing to a payment schedule change–speak to your lender and evaluate options. If it’s allowed by the lender, submitting extra payments without committing to a formal agreement can protect you down the road, if cash flow from the business shifts. Flexibility can be important.

5. Will the payment go toward the principal balance when it’s received? If you are considering the loan modification from monthly to biweekly payments, we recommend first confirming the payments are applied to your loan upon when they’re received. Some lenders hold on to the first check until the second payment is received each month, applying them both to the loan at the same time… substantially reducing the impact of paying more frequently. Processing charges for the increased volume of payments can also reduce the benefit, so be sure to ask about fees.

Do you have questions about a commercial mortgage, extra payments or cash flow for your business? We’re here to help if you’d like to stop by the closest branch or schedule an appointment.

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