Commercial vs Conventional loan: WWYD?

Question

Tell me what you would do.I am buying an STR and can pick between two lending options right now. I will detail both.

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1. The commercial loan: Borrowing $135,000 at 4.875% for a 5-year term, 20-year amort, with closing costs being $2,000.

Monthly payments would be around $881/mth. The interest rate will fluctuate based on the market every 5 years but let say it stays similar since I have always been able to get lower interest rates. Total P/I payments would be $211,400 at the end, plus the $2,000 closing (and let's say I have to pay this every 5 years to refinance) would be a total of $219,440.

2. The conventional loan: Borrowing $135,000 at 6.5% for the 30-year term, closing costs are around $4,950.

Monthly payments here are around $853/mth. Total P/I payments would be $307,080 at the end, plus the $4,950 to close the first time around would equal a total of $312,030.

Conclusion:

From my math, even if I have to pay closing costs on the commercial loan every five years, I would still save around $100K going the commercial route. I just don't see the $30/month of savings going with the conventional to be worth the $100K in the end.

Am I missing anything? Let me know what you would choose.

Jai Reddy · Answer

I would go the conventional, and that would give me the flexibility to NOT refinance when I do not want to. Yes, the past decade, interest rates have been low so you've been able to refinance at a fairly lower or similar rate. But 5 years from now, you may be in a different situation where you cannot prove your creditworthiness, or the market may be tighter in lending.

Andrea Flores · Answer

Hey there. The 6.5% is on a portfolio conventional loan. I got 4.875% on the commercial, so all good here. Thanks

Jai Reddy · Answer

@Andrea Flores I've been shopping for loans and have been quoted between 3.875 to 4.25 for a 10 year fixed on a commercial loan. This is from a local bank.

Andrea Flores · Answer

Be that as it may, that's what I was quoted for my area.

Also, could you tell me how many STR's you have purchased recently?

Jai Reddy · Answer

@Andrea Flores

The 6.5% interest rate on 30 year conventional is high!

Andrea Flores · Answer

No exit strategy. It's an STR. Not pulling cash out either, unless I need to down the road but I don't think there will be much equity in it by then. Depends. It's just a money maker.

The only reason I have to refinance after 5 years is that it's a balloon mortgage and I won't be paying it off at the end of the term. The mortgage lender already said it would probably only cost $600 if I go with them, I just factored in $2K at the moment because I wasn't sure.

Taylor L. · Answer

Are all other factors equal? i.e. non-recourse, yield maintenance and/or defeasance, etc? When you refinance the conventional loan are you planning to pull money back out? What is your exit strategy on this property?