How Much Can You Benefit When Refinancing?

Examples of Potential Savings:

Example 1 – Refinancing a childcare center which currently has a SBA loan with a current balance of $1.0 million, variable interest rate at the Prime Rate plus 2.75% (the maximum rate allowed by the SBA), the interest rate when the loan was issued seven years ago was 6% and has increased to 7.25%, 25 year term.

  • When the loan was issued, the monthly payment was $7,581 and it has since increased to $8,302 This is an increase in the monthly payment of $720 and if interest rates remain unchanged, will lead to an additional $155,000 of interest to be paid over the remaining life of the loan (216 months)… unless refinanced!
  • If interest rates increase by an additional 1% to 8.25%, the monthly payments could increase to $8,901. This could increase the additional interest expense by over $285,000 to be paid over the remaining life of the SBA loan.

Refinancing through Childcare Brokers will typically provide saving as follows:

    • Conventional commercial loan at a 4.75% to 5.75% interest rate, interest rate is fixed for the first five years and then re-fixed for the next five years, 20 year amortization. The monthly payments are $7,021 (for a 5.75% loan) to $6,462 (for a 4.75% loan). By refinancing, the yearly reduction in loan payments is $15,370 (for a 5.75% loan) to $22,070 (for a 4.75% loan). Refinancing with a 5.75% loan could save up to $185,000 in interest expense over the life of the loan, and refinancing with a 4.75% loan could save up to $303,000 in interest expense.
    • For childcare centers in rural areas, the yearly loan payments can be reduced even more by refinancing to an USDA B&I loan at the Prime Interest Rate +1.25% to +1.75% (5.75% to 6.25%), interest rate is fixed for the first five years and then re-fixed for each of the next five years, 30 year term. The monthly payments are $5,836 (for a 5.75% loan) to $6,157 (for a 6.25% loan). By refinancing into an USDA B&I loan, the yearly loan payments can be reduced up to $29,600.

Example 2 – Same as Example 1 above, except, the variable interest rate on the current loan is the Prime Rate plus 2.25%, the interest rate when the loan was issued seven years ago was 5.5% and has increased to 6.75%.

  • The monthly payment on the current loan is $8,010.

Refinancing through Childcare Brokers will typically provide saving as follows:
Conventional commercial loan at a 4.75% to 5.75% interest rate, interest rate is fixed for the first five years and then re-fixed for the next five years, 20 year amortization. By refinancing, the yearly reduction in loan payments is $11,865 (for a 5.75% loan) to $18,569 (for a 4.75% loan). Refinancing with a 5.75% loan could save up to $122,000 in interest expense over the life of the loan, and refinancing with a 4.75% loan could save up to $240,000 in interest expense.

Example 3 – Same as Example 2 above, except, the loan was originally issued 10 years ago.

  • The monthly payment on the current loan $9,129.

Refinancing through Childcare Brokers will typically provide saving as follows:
Conventional commercial loan at a 4.75% to 5.75% interest rate, interest rate is fixed for the first five years and then re-fixed for the next five years, 20 year amortization. By refinancing, the yearly reduction in loan payments is $25,290 (for a 5.75% loan) to $32,000 (for a 4.75% loan). Refinancing with a 5.75% loan could save up to $122,000 in interest expense over the life of the loan, and refinancing with a 4.75% loan could save up to $240,000 in interest expense.

Example 4 – Financing the acquisition of a childcare center with a $2.0 million SBA loan. Many lenders will be willing to finance it at a variable interest rate at the Prime Rate plus 2.75% (currently 7.25%), 25 year term. If a childcare center were to finance with these lenders, the monthly payments would be $14,456.

Childcare Brokers will typically provide a SBA 7(a) or a SBA 504 loan options as follows:

  • SBA 7(a) loan at a variable rate at the Prime Rate plus 1.75% to 2.0% (currently 6.25% to 6.50%), 25 year term.By financing through Childcare Brokers, the borrower’s monthly loan payments would only be $13,193 (for a Prime +1.75% loan) to $13,504 (for a Prime +2.0% loan). This could save up to $378,000 of interest expense over the life of the loan.
  • SBA 504 loan with part of the loan fixed at a 4.8% interest rate for 20 years, and the other part of the loan fixed at 6% interest for the first 5 years with a 10 year term and 20 year amortization. By financing through Childcare Brokers, the borrower’s monthly loan payments would be $5,769 (for the 5% loan) and $7,960 (for the 6% loan). The total monthly payments are $13,729, and the loans are paid off in 20 years instead of 25 years. This could save the borrower up to $900,000 over the life of the loan!

Example 5 – Refinancing a childcare center which currently has a CONVENTIONAL commercial loan with a current balance of $1.0 million with a balloon payment due.

  • Since the current loan was issued five years ago, the Prime Rate has increased by 1.25% and is expected to continue to increase into 2018.

Refinancing through Childcare Brokers could provide saving as follows:

  • Conventional commercial loan at a 4.75% to 5.75% interest rate, interest rate is fixed for the first five years and then re-fixed for the next five years, 20 year amortization. The monthly payments are $7,020 (for a 5.75% loan) to $6,462 (for a 4.75% loan). The advantage of this loan versus many traditional conventional loans is that the borrower does not need to go through a loan underwriting and closings every five years. The loan term is 10 to 20 years.   
  • SBA 504 loan with part of the loan fixed at a 4.8% interest rate for 20 years, and the other part of the loan fixed at a 6% interest for the first 5 years with a 10 year term. By financing through Childcare Brokers, the borrower’s two monthly loan payments could total to about the same $6,876 as from a 5.5% convention loan during the first five years. The advantages of the SBA 504 loan, over a typical conventional loan, is if interest rates increase within five years, by having part of the loan fixed at 4.8% for the entire 20 years, the borrower saves about $36,000 for every 1% increase in interest rates over the life of the loan. The loan is also never called or have a balloon payment, so any future loan closing costs in 5, 10, or 15 years are eliminated. The SBA 504 loan also eliminates the risk that when the childcare center would be up for refinancing in 5 or 10 years, that a lender would not refinance the loan.  
  • For childcare centers in rural areas, the yearly loan payments can be reduced even more by refinancing to an USDA B&I loan at the Prime Interest Rate +1.25% to +1.75% (5.75% to 6.25%), interest rate is fixed for the first five years and then re-fixed for each of the next five years, 30 year term. The monthly payments are $5,835 (for a 5.75% loan) to $6,157 (for a 6.25% loan). By refinancing into an USDA B&I loan, the yearly loan payments can be reduced up to an additional $14,400 as compared to the above conventional loan example.

The above examples are typical loan terms as of December 15, 2017. These examples provide an idea of the savings that can be obtained through refinancing away from a SBA variable rate loan at a high interest rate to a fixed rate loan for a childcare center. Please contact Childcare Brokers to discuss to get a better estimate of the potential savings for your center. See “We Know The Lenders With The Best Rates For Childcare Centers” for a more complete review of rates and terms.

If You Are Considering Refinancing Your Childcare Center’s SBA Loan Or Conventional Commercial Loan, You Should Consider The Following:

  • How much can you benefit from refinancing through lower interest rates or lower monthly payments?
  • Since all refinancing has closing fees, is it worthwhile to refinance?
  • How else can you benefit? For example,
    • If you have an impending balloon payment, you may want to secure a new loan without any balloon payments.
    • If you have a variable interest rate, you may want to reduce your risk from interest rate increases, by getting a fixed interest rate loan.

To help you figure out if it makes financial sense for you to refinance your current loan; the bank closing fees to refinance into a $1.0 million conventional commercial loan for a childcare center would typically be up to $25k to $30k. For a $2.0 million conventional loan, the bank closing fees are typically up to $35k to $40k.

The closing fees to finance into a $1.0 million SBA 7(a) loan for a childcare center would typically be $30k to $35k (this includes the $22,500 SBA guarantee fee). For a $2.0 million SBA 7(a) loan, the closing fees will typically be $60k to $65k (this includes the $53,750 SBA guarantee fee). Closing fees for SBA 504 and USDA B&I loans are very similar to SBA 7(a) loans.

Closing fees can be rolled into the new loan and financed (if the cash flow and the loan to value ratio permits it).

JayWhitney@ChildcareBrokers.com 770-410-7582

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