Board Topic: 10yr vs 20 yr loan
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10yr vs 20 yr loan

Posted by: Dorothy Nov 8 2003, 03:12 AM
I am buying a 1.6M property with 900K down in Texas. I am looking at loans. How do I compare a 20yr amortized over 20 yrs with a prepayment at 7% vs a 10 yr amortized over 25 years at 6.5%. And are these good rates for the times and Texas?

Posted by: loanuniverse Nov 8 2003, 05:46 PM
The first thing I notice from your question is that your equity contribution is very substantial. The resulting loan to value for the lender will be less than 44%. Is there a particular reason why the loan is so low? Type of property? Cash flow? Personal preference? Remember that any of these factors would not only affect the loan to value, but will also affect pricing.

Regarding the pricing that was quoted. I think that the numbers are competitive. Now take into consideration a couple of factors when you take this into consideration. one: I am far away from Texas, but it would be safe to say that the rates don’t vary by much. two: Do not know what kind of property this is or the strength of the source of repayment, which would affect pricing. The extreme example of this point would be to say something like Warren Buffet will not get the same rate for a loan than you or I would get. three: Most banks do not structure these loans with 20 or 25 year maturities.

My basis for saying that the quoted rates are competitive is the kind of products that my employer and others in my area are offering. Right now, there is a product that is being pushed with a fifteen year maturity and a 6.75% fixed rate directed at the small business market, which would be loans under one million. I also know of another bank that is also offering a similar fifteen year loan with a rate around 6.5%.

If there is one thing that I do not like, it is that prepayment penalty From the point of view of the borrower, they are not a good deal. Try to get it eliminated and if that does not work, then try to get it lowered. For example the prepayment penalty might be 5/4/3/2/1 then see if you can get a 3/2/1.

Good luck and I hope this helps

Posted by: Dorothy Nov 9 2003, 08:49 PM
Thank you. Your comprehensive and straightforward response was most helpful. I am buying a fast food restaurant through a 1031 exchange (high down)

15yr 6.75 sounds good. How many points?

Why do points vary so much?

Posted by: loanuniverse Nov 10 2003, 10:11 AM
Dorothy:

15yr 6.75 sounds good. How many points? Why do points vary so much? I suspected that the origination fee was 1% and just got a confirmation from one of the credit officers that the fee is indeed 1%.

Having said that, points just like anything else is negotiable. If I were to put it in terms of difficulty from easiest to hardest in getting pricing items negotiated down, they would be:

1 Prepayment penalty. Last time I checked less than 20% of the commercial real estate loans generated by community banks had this.

2 Reducing the rate by 25 basis points or less. Unless you are getting the loan at the lowest of the range at which the lender is willing to do the loan there might be some wiggle room.

3 Getting a break in the origination fee from 1% to say 50 basis points.

4 Reducing the rate substantially or practically eliminating the origination fee. The bank would have to be really hungry for the business.

Of course this is just from experience, and the culture of the lender with whom you are doing business might be different. It could be that they lost 10% of their portfolio last year to other banks and the President of the bank said something like “for now on, all of our loans have a prepayment penalty”. There might be other institutions that have the rates set at a certain number and requires the agreement of a higher level officer to lower the rate, that kind of situation might give pause to your lender. It might be a case of picking the “right battles to fight”.

Regarding the difference in “points”, I have not seen that much of a difference in commercial real estate mortgages. If anything, I would say that the standard would be 1%. However, the market is very competitive and usually results on a lower number. It all depends on your overall relationship with the lender.

The fact that you are doing a 1031 exchange with have that much money for a down payment works both in your favor and against you. First, your loan to value is great offering a cushion and level of comfort to the lender. However, it also puts you under a time constraint in addition to the one in the purchase contract. You must close on that equivalent property within the allotted period of time.

Assuming that you have enough time, I would take a copy of the purchase contract, a copy of the lease, a copy of your personal financial and tax returns and walk to another lender in the area just to see what they come up with. At the very least try to get that prepayment removed.

Good luck.
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