Are you actually timing refinances around rates, or is that a losing game?

Question

Personally, unless I've got something in the 3s, which I don't since most of my portfolio is commercial, I'm looking at return on equity combined with velocity of capital more than the rate itself. If I can refinance from a 4 to a 6.5 but use that money to get a 20-30% return on a value-add deal through forced appreciation, why wouldn't I? Are you refinancing based on rate movement, or purely based on when the deal's numbers actually make sense regardless of rates?

Noah Wright · Answer

Thinking in return on equity instead of the rate is the right frame. One piece that gets missed in the 4 versus 6.5 math is that the higher rate lands on the whole new loan, not just the cash you pull out. The true cost of that new money is the extra interest on the balance you already had plus the interest on the new cash, divided by the new cash. When the existing balance is big and the cash out is small, that cost runs well above 6.5, and that's the number your 20-30% has to beat. On commercial debt, check the prepay on the current loan too, since step-downs and yield maintenance are common. Sometimes pulling the cash from a different property gives up less. How big is the cash out compared to the balance you'd be refinancing?

Greg Scott · Answer

If you can refi at one rate and invest those monies at a much higher rate, then of course you should.

On the other hand, it is not that simple. You need to take into account closing costs, your cash reserves, and the effects on cashflow of your current and future portfolio. The refi decision should also take into account that the interest rate is known while the future returns are just projections that could be incorrect. With all that in mind, if it still makes sense, then go for it.

Divin Kanyama · Answer

@Andrew Freed ,Rate movement matters, but it should not be the decision by itself. The better question is whether the equity being pulled out can produce a sufficiently higher risk-adjusted return than the added cost of debt. Moving from 4% to 6.5% can make sense when the released capital has a clear path to a 20%–30% value-add return, but only after accounting for closing costs, the larger debt payment, taxes, execution risk, and the possibility that the next project takes longer than planned.

So the refinance should be driven by the deal economics, not simply by waiting for rates to fall or reacting when they rise. The key is to compare the incremental return on the new investment with the incremental cost and risk across the entire portfolio. If the original property still cash-flows comfortably, reserves remain strong, and the new opportunity is compelling under conservative assumptions, velocity of capital can outweigh preserving a low rate. A cheap loan is valuable, but trapped equity has an opportunity cost too.

Henry Clark · Answer

OP if your commercial then you have a 3/5/7 year balloon unless SBA. You’re going to have to move to a higher rate no matter what.

We took a risk management approach.

Had 5 year balloons. With 1 to 1.5 years remaining in several loans. Was worried about the interest rates. Plus at the refi environment.

We refi’d early. Added 1 % point increase. Extended to another 5 and a 7 year ballon. Took risk off the table. Cost us 1% higher for 1 to 1.5 years.

Are you actually timing refinances around rates, or is that a losing game?

Are you actually timing refinances around rates, or is that a losing game?

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