The Step by Step Guide to Refinancing Your Underlying Co-op Mortgage

There are a lot of benefits to refinancing your underlying co-op mortgage. These include a lower interest rate and changing your loan term. Depending on your why, refinancing may be the right choice for your co-op mortgage.

Borrowers save an average of $2,800 annually by refinancing their loans. With a 10-year loan, this would equal out to $28,000. 

Underlying co-op mortgages have shorter terms than residential mortgages and often have balloon payments at the end, so refinancing is common with these types of loans. 

Keep reading to understand how to refinance an underlying co-op mortgage. 

What is an Underlying Co-Op Mortgage?

It’s important to understand what a mortgage is and how an underlying mortgage differs. Co-ops have special mortgages and rules on how funding works.

What is a Mortgage?

A mortgage is a loan that uses a form of real estate as collateral. When you take out a mortgage loan, the property you purchase can be taken back from the lender if payments are not made. 

An underlying mortgage is the lending a co-op obtains by using the apartment building as collateral. It’s called underlying because this mortgage comes before all others.

Since the co-op is technically owned by a corporation and all shareholders hold a stake in it, the mortgage payment is dependent on member fees. Co-op members pay maintenance fees to pay on the underlying mortgage loan and other related costs. 

How is a Co-Op Mortgage Different From a Traditional Mortgage?

There are a lot of different factors involved in a co-op situation. While the corporation has an underlying mortgage payment, the shareholders may also have mortgages. Each shareholder can take out individual mortgage loans to pay for their shares in the corporation. Their shares then purchase their living unit. 

There are tax benefits for members by having an underlying mortgage, so most co-ops keep refinancing to reap these. Some benefits include: 

• Interest can be deducted
• Fees related to maintenance and improvements
• Individual shares of local, state, and property taxes for the property

Many co-ops keep an underlying mortgage to avoid paying the balloon payment due at the end of the term. A balloon payment is a large number of funds due at the end of a loan term. Only a small percentage of the principal payment is paid with an underlying mortgage because the terms are so short, leaving the rest of it due at the end. Terms usually last around 10 years. 

What is Mortgage Refinancing?

Refinancing is when you replace your current co-op mortgage loan with a new one. The terms and rates change when you secure a new loan. This can often lead to cost savings. 

The process is similar to when you first obtained your mortgage loan. There are a lot of steps and documentation involved. Your co-op board of directors should do a thorough business and financial analysis before deciding to refinance your underlying co-op mortgage. 

If there won’t be monetary savings from avoiding the balloon payment or obtaining a lower interest rate, refinancing doesn’t make sense. All professionals and board members should have input to this important decision regarding your co-op. 

There are several types of refinancing loans available. They are outlined below with details on why each is usually chosen. 

Types of Refinancing 

A cash-out refinance allows you to get more cash immediately. When you do a cash-out type of loan, you take out an amount higher than the existing mortgage. This allows you to have cash on hand for other investments, building renovations, or even personal reasons. You can also obtain a refinanced loan to make capital improvements to your property.

Let’s say you’ve taken out a mortgage for $150,000 and have a repayment term of 5 years, after which you’ll need to make a balloon payment for the remainder of the loan. That’s one-sixth of the time you’d have to pay back a residential mortgage loan.

There are a few different options…each type offers different benefits, which we’ll explain using the above example as a reference point outlined below. 

Traditional Commercial Refinance

This is the most common type of refinanced loan. It is to secure a lower interest rate. The terms are often similar to the original mortgage. 

You would take the balloon payment due at the end of the above five-year loan and refinance it with new terms. You do end up paying quite a bit of interest over the life of the loan since it continues to be refinanced. But the benefits it offers your members can offset this cost.  

For example: say you owe $140,000 on the five-year loan because most of your payments were interest-only. You would create a new loan for the $140,000 with a different term and interest rate than your previous loan. 

Commercial Cash-Out Refinance

This type allows the property owner to tap into the existing equity for cash. The required amount of equity varies by lender. It is usually significant. 

With this type of loan, you are using the collateral and the amount you have paid off already to take out more than you owe. 

For example, you owe $120,000 at the end of the term. With this type of refinance option, you would apply for a $200,000 mortgage loan. This would leave you with $80,000 to use for investments or capital improvements. 

Commercial Mortgage Bridge Loans

This type of loan is a short-term, usually less than two years, loan that allows the owner to use it until long-term financing can be secured. This option is generally interest-only with a large balloon payment when the terms are up. 

This type of loan is best used during transitional periods. For example, your term is ending at the same time your board is voting in new leadership. This would be a difficult time to make an important decision like refinancing, so choosing a bridge loan would allow your co-op to instill new leadership before finalizing refinancing options. 

Financing Requirements

When considering a refinance, you should look at your net operating income. This is the equivalent of a personal credit score for commercial lending and will be assessed. Your entire co-op financial status will be looked over, so it’s always important to keep detailed and audit-ready financial documents. 

The debt-service coverage ratio will tell lenders how much debt your co-op is in and whether it’s a financially wise move to refinance. 

Your business also has its own credit score. This will be reviewed along with all required documentation to determine if your co-op qualifies for refinancing. 

How Do I Calculate My Net Operating Income?

To determine your net income from the co-op, you must include all streams of income. If you have paid amenities on-site, the income generated should be included. If you have a vending machine on-site, those funds are included. Maintenance fees are also included. 

You also need a clear look at your operating expenses. Mortgage payments, property taxes, fees, electricity, insurance, and utility bills are all included. 

To calculate your net operating income, you subtract your operating expenses from revenue. For example, you generate $500,000 in revenue from your co-op. It costs $450,000 to operate the co-op. Your net operating income (NOI) would equal $50,000. 

Lenders use this metric to determine if the co-op is profitable. When refinancing, you have to prove your co-op will bring in the money needed to repay the underlying mortgage. 

What is a Debt Service Ratio and How Does It Impact Refinancing?

The debt service ratio is a current snapshot of your co-op’s cash flow in relation to your debt. This shows lenders if you have the cash flow to pay your current debt. 

Debt service is the amount of cash you need to repay current debts. It would include both interest and principal payments to determine the debt service. 

To calculate your debt service ratio, you take your net operating income and divide it by your debt service. For example, You have that above $50,000 NOI and have $25,000 in debt. This would leave your score at 2. 

Debt service scores less than 1 mean negative cash flow. Scores higher than 1 usually mean the company has sufficient funding to pay back debts. 

How Important is a Business Credit Score? 

A business credit score is much like a personal credit score. It tells lenders how trustworthy your business is. Business credit scores are calculated based on company details, such as annual revenue, number of employees, and past payment history. 

This score is important because it can help lenders determine how risky it would be to give you a loan. 

Why Should I Refinance?

The main reason cooperatives refinance their underlying mortgages is to get a lower interest rate. When you save costs in a cooperative, the savings roll back to the shareholders. This leads to a happier community. 

Many co-ops refinance the underlying mortgage at the end of its term instead of paying off the principal balance. This is a strategic move to help shareholders. This option also avoids balloon payments since commercial mortgages have shorter terms than residential mortgages. 

Shareholders in your co-op pay monthly maintenance fees to cover the underlying mortgage payment. Since these payments go toward the building, shareholders can claim these fees as a tax write-off. So, continually refinancing your co-op mortgage every so often has a monetary benefit for everyone. 

Gaining the assistance of an award-winning and leading lending company, like Aurum and Sharpe, can help you to have a seamless refinancing process. We are experts in navigating the refinancing process. Allow us to lend our expertise to lower your interest rate and make the most of your investment. 

What To Do Before Refinancing Your Underlying Co-Op Mortgage 

Once your board of directors determines it’s time to refinance, you need to take a few steps before approaching lenders. Refinancing a mortgage is much like applying for one. You need a lot of information and documents, so it’s best to have these prepared and ready to go. 

Refinancing an underlying mortgage is an important decision for the board to make. It will impact maintenance fees and market value. It should be approached strategically and thought out thoroughly. 

The board of directors should do a thorough analysis to make sure refinancing is the right move for the co-op. They should also ensure it’s a move that can be made financially. You can calculate what your estimated payment would be with this mortgage payment calculator. 

Boards should assess: 

• Revenue generated
• Operating expenses
• Existing debt
• Balance sheet
• Income statement
• Projected income and revenue

Once your board has made the decision, follow these steps. 

Collect Necessary Information

Before you begin to collect information, you should meet with your attorney, accountant, and managing agent. This meeting should be to discuss the plan for refinancing and what information to gather and from where. 

Profit and Loss Statement

A profit and loss statement will show how well your co-op is doing. This is a snapshot of income and expenses for a certain period of time. Most lenders want the past three years of documentation to understand the co-op’s standing. 

Tax Returns

Lenders want to see tax returns to ensure income and revenue are consistent or growing. During the underwriting and due diligence process, lenders review your documentation to determine overall financial health. 

Rent Roll

A rent roll is a list of shareholders living in the building and what they are worth. This document shows the monthly payment, leasing terms, and type of lease for each unit. For example: your building has 10 shareholders. Half of them pay $900 a month and the other half pays $1,500 a month. All of the leases are month-to-month with various terms. You would detail each one individually. 

Capital Improvement Summaries

This summary will be a list of capital improvement projects, the date they were completed, and how much they cost. Capital improvements are any renovations or changes that make a permanent change to the building that increases the property’s value. 

Building Profile

A building profile is a comprehensive document that uses the information in the documents outlined above. You will use this information to create a comprehensive profile of your building. You should have all information regarding changes made, including the date and exact amendments. 

This document should also include a complete history of the building: when it was built, number of floors, number of elevators, etc. You should also outline any amenities you provide at this location. These could include: 

• In-house theater
• Pool
• Wine cellar
• Community room
• Gazebo

You should also document commercial space and photograph the inside and outside of the building, including photographs of several apartments. For each apartment, you should include snapshots of each room. 

Financial Status 

This is where the accountant is beneficial. You’ll need audit-ready financial statements for the past three years and a detailed budget report. You’ll need to disclose an operating report and bank statements. 

This report should also include information on vacant units, a list of when leases are set to expire, resales in the past three years, and maintenance roll by apartment. 

If you have any delinquencies, they should be listed with a detailed reason why, the notices sent, and what action was taken. 

Physical Condition

Honesty is the best policy. If your building will need repairs in the near future, you should be upfront about this when refinancing. Your managing director, or even an external evaluator, can help you to create a report with the most accurate physical condition of the building. You should include information about: 

• Plumbing
• Electrical
• Roofing
• Heating/Cooling

The information should include any capital repairs already made and how much was spent. You will also probably need the following information: 

• Assessed valuation
• Tax abatements
• Preliminary title report
• Public record search

Your attorney and managing agent can help to obtain these records. 

Plan for Additional Funding

When COVID-19 hit, many lenders and co-ops were impacted. Many people had to get creative about how they would obtain funding. If you had to get innovative, you should include it in your documents in case you are asked about it. 

Some lenders are requiring co-ops to have a COVID-19 debt service reserve. This reserve has enough funds to cover three to six months of mortgage payments. 

Acquiring the assistance of a professional brokerage firm, like Aurum and Sharpe, can help you determine if you need this plan or not. As experts in commercial lending, we can provide you with the guidance you need to refinance your underlying co-op mortgage successfully. 

Understand the Appropriate Terms 

Before meeting with a lender to refinance your mortgage, it’s important you understand exactly what they’ll be talking about. Each of the terms below is a common topic addressed in the process of refinancing a co-op mortgage. Understanding these words will help you to streamline the process and transparently make a refinancing decision. 

Mortgage

A co-op mortgage is where a corporation owns the housing building. Shareholders then purchase shares of the corporation, allowing them to live in the building. 

The residents, or members, are all partial owners of the building. The corporation owning the building is the name on the deed. 

Residents can purchase living units in the value of the shares held. The more shares held, the higher the value they can purchase. Bigger apartments are worth much more shares than smaller apartments. 

Prepayment 

A prepayment is an additional payment you make on the principal balance of your loan. This will help you to pay down the actual amount you owe, thus reducing your overall interest. 

Some lenders charge a penalty for paying a loan early. 

Amortization

Amortization is the process of paying off your loan in monthly payments. It’s a schedule with equal payments and a fixed rate that will mean the loan is paid off when the schedule is completed. 

Fees

There are various fees related to refinancing a mortgage. There could be potential penalties for paying off the co-op mortgage early. Some common fees include: 

Closing Costs

Closing costs are the fees related to processing and securing your new refinanced mortgage. Closing costs vary, but they average from 2% to 6% of your existing loan. Closing costs must be paid with cash or a cashier’s check. This fee is never waived and must be calculated before applying to ensure you can pay it.

Application Fees

Not all lenders charge an application fee. When an application fee is required, you must pay it whether your application is selected or not. When choosing a lender, you should review their services to see if an upfront fee is required. Some are as high as $500. 

Document Preparation Fee

This fee covers the administrative and preparation time to complete all required documents for your mortgage. Lenders spend a lot of time on this process and it can be time-consuming. This fee generally runs around $100, but it can vary based on the lender and the complexity of your loan. 

Loan Origination Fee

The loan origination fee is what the lender charges to make your co-op mortgage refinanced loan. This generally includes processing your application, underwriting, administrative tasks, and funding the loan. The fee is dependent on the amount of the loan. Most lenders charge 0.5% to 1% of the total loan amount for the origination fee. 

Depending on the lender you choose, the fees will vary. You can check out the process and services provided at Aurum and Sharpe for more information.

Flexibility 

Flexibility refers to your mortgage payments. This term means that the payments can be flexible when needed. This is a common term with interest-only loans, which most underlying co-op mortgages are. With a flexible payment, you can pay extra payments without a penalty for paying your principal too early. 

Market Rate

The market rate is the going rate. It changes with the economy and increases as demand does. 

This is also a type of co-op. With this kind, the value of the building is determined much like a house value is. An appraiser researches current market conditions and then determines the worth of your shares. 

Limited Equity

This is another type of co-op where the equity you are allowed to obtain is limited. There are rules put into place about how much you can sell the units for and what kind of money you can make from it. 

Leasing Co-Op

This type of co-op is exactly how it sounds. The building is leased and there are no owners. No member of the co-op gets equity with this option. Leased co-ops are generally found when the corporation is a nonprofit company. Members are sometimes allowed to take part of their share of the cash reserves if they leave. 

Group Equity

With this type of co-op, the group as a whole owns the property. This makes it hard for anyone to benefit from equity gains. When a member leaves the co-op, they don’t get to take any funds except their initial deposit. The cost to enter a group equity co-op is generally much lower than other types because the members don’t benefit long-term. 

Get Help From a Professional Broker

This is an important step in the process. Once you have determined you are ready to refinance and have gathered the appropriate information, it’s time to choose your lender. 

To ease this process and streamline the time it takes to complete your refinancing, you can get help from a broker. 

Researching the best lender can be a time-consuming and daunting task. At Aurum and Sharpe, we have 29 years of combined experience in commercial brokering. We have an extensive network and are ready to help you find the very best lender for your refinancing needs. 

What is Fiduciary Duty? 

Fiduciary duty is the confidence and trust placed in one party to act for another. When working with a professional broker, they have a fiduciary duty to make decisions in your best interest. This is a law to ensure no conflicts of interest arise during the relationship. 

A breach of fiduciary duty can lead to serious consequences. These range from legal situations to loss of reputation. More complex breaches can lead to loss of licensure and credentials. 

You can rest assured that we at Aurum and Sharpe will always consider all options available to get the best deal possible for your refinancing needs. 

Important Things to Know Going In

If you decide to complicate things and skip the broker, or just want to know more about what you’re getting into, keep these things in mind when researching lenders:

• Make sure they offer co-op mortgage refinancing
• Understand the fees associated
• Ask about rates 
• Review loan terms

Whichever decision you make, it’s important to make the decision as a board. 

What Does a Broker Do?

A commercial loan broker can help you create your loan package and present you as a worthy candidate to lenders. Lenders can be very picky and will deny refinancing if they see instability or problems with your co-op. 

By creating a package that showcases your standing honestly, you are putting your best foot forward. 

A broker serves as a liaison, bringing borrowers and lenders together. A broker will assess your co-op and determine the best lenders available for refinancing. A broker also collects and submits required paperwork during the process. 

The broker qualifies you as a candidate with lenders, and they present the offerings to you so you can decide. They serve as an intermediary throughout the transaction. 

Benefits of Using a Broker

Not only does a broker have the expertise you need, but they can offer other benefits. You worry less because experts are handling your situation. You don’t have to communicate with dozens of lenders because brokers already have an extensive lending network. 

Saves You Time

A broker puts your loan package together. This can save you hours of time. They also present your application to lenders, meaning you don’t have to do extensive research to identify and apply to lenders.

Brokers have the knowledge needed to make your application look as appealing as possible, leading to more success. They also coordinate all paperwork and research rates and fees for you. 

Can Lower Expenses over the Life of the Loan

Brokers are professional negotiators. When you use a broker, you gain their expertise in loan pricing and interest rates. They can negotiate lower fees. Overall, these lead to decreased expenses throughout the life of the underlying co-op mortgage.

Brokers understand the mortgage industry and can guide you in making the most strategic and financially sound decisions regarding your refinancing application. 

Some Lenders Work Exclusively with Brokers

Some mortgage lenders work exclusively with brokers. This means you can’t even have access to these lenders without having a broker helping you with your application. Brokers have an expansive knowledge of their lending network and can submit your application to all appropriate lenders soon after preparing the package. 

So, using a broker not only provides potential cost savings, it can open your refinancing options up to opportunities you may not secure otherwise. 

Understand Mortgage Rates

Understanding the current rates is important when refinancing a mortgage. You don’t want to refinance when mortgage rates are higher than what you are already paying. 

Shopping around will tell you the lending rates on co-op mortgages, or a broker can help you with this. 

Mortgage rates are determined based on the price of mortgage-backed securities. These securities are traded like bonds, meaning mortgage rates can change daily – sometimes several times a day. 

Mortgage rates change in the opposite direction of the securities. If a security price increases, the mortgage rate will decrease. If a security price decreases, the mortgage rate will increase. 

When refinancing, you can make an agreement with the lender you choose and lock in the rate for that specific time. Most rates lock in for 30 days. 

Pros and Cons of Refinancing

There are pros and cons to refinancing your underlying co-op mortgage. The pros include lowering your interest rate and payment amount. But the cons associated with it are you have to pay closing costs, your loan term can be longer, and it can be a lengthy process. 

Pros

Depending on the type of refinance loan you apply for, you could see many benefits. Lower interest rates can lead to lower payments for you and your co-op members. If you do a cash-out loan, you could make improvements and increase the value of your co-op building. This would lead to tax benefits for you and your members. 

You can avoid balloon payments by refinancing. A refinanced co-op mortgage is reset with a new fixed term, meaning you won’t have upcoming changes in the short term. 

Cons

Refinancing can have some upfront expenses. You are facing potential fees associated with loans and applications, as well as closing costs. You would need to have these costs available to pay in cash before deciding to refinance. 

A new term means you have 10 more years of payments. If you take a cash-out refinance loan, you will likely be paying a higher payment to cover the extra cash you borrow. 

To determine if refinancing is right for you, you must weigh the pros and cons against your specific co-op situation. Asking for assistance from a professional can help you to make the right decision. 

How to Refinance Your Underlying Co-Op Mortgage 

Now that you have all the necessary information and a game plan, it’s time to start the process. Most refinanced loans take between 15 and 45 days to close. To speed up the process, you’ll need to: 

1. Select a point person for the process
2. Apply for refinancing 
3. Submit all required documents 
4. Respond to outstanding requests
5. Complete the closing process

While the list seems straightforward, it is much more complex than it appears. There are many moving aspects of each step that much be addressed. Being organized and timely will make the process move faster. 

To take some guesswork out of the process, here are some tips for each step: 

Selecting a Point Person

This can streamline the application process because a single person is in charge of all communications. This will reduce miscommunication or lack of information that happens when several people are handling a situation.

The point person can be the representative for the co-op’s board of directors. This person can speak to brokers, lenders, and any other necessary contacts, serving as a liaison to pass on accurate information. 

Apply for Refinancing

This will be much like when you applied for the original underlying mortgage. It tends to be a lengthy process with a lot of information required. It’s best to apply to several lenders to get the best deal. 

To speed up and simplify this process, you can work with a commercial broker. 

Submit Required Documents

It’s important you submit all required documents as soon as possible so you don’t delay the process. Partnering with a broker will eliminate this for you because they will handle the documentation for you. 

Respond to Outstanding Requests

During the application and processing stages, lenders may request more information or additional documentation. It’s important to provide this information quickly. By gathering all the documentation we listed at the beginning of the article, you will be prepared for almost any request they could have. 

Complete the Closing Process

This process finalizes your loan. Without going through the closing process, you will not receive your funds. It’s important you are available for this when it is scheduled and you bring all required documentation and payment for closing costs. 

Tips for Successful Refinancing

If you go into the process with specific goals in mind, you will have a more successful outcome. To have a successful co-op mortgage refinance, you should consider a few things. The following are some tips to ensure your success. 

Set Your Goal

Is your goal to pay off the mortgage? Do you want a lower monthly payment? Are you just looking to lower your interest rate? Knowing this ahead of time will help speed the process up and get you a faster decision. Discussing your overall goal with the board of directors will help you to determine the reason for the refinancing. 

Calculate Your Loan-to-Value Ratio

The loan-to-value ratio is how much equity your co-op is worth. It shows a comparison of how much your co-op is worth vs. how much you owe on the mortgage. You can calculate it easily online. 

To calculate the ratio, you compare the amount of the loan with the appraised value of the property. 

Research All Available Options

Researching all available refinancing options and understanding which ones work with your goals will help you to succeed. It will also save you time since you won’t be wasting it on refinancing options that aren’t going to meet your needs. A professional broker will do this step for you if you choose to work with one. 

Start Your Co-Op Mortgage Refinancing Process Today

You’ve learned about your underlying co-op mortgage refinancing options. Now that you understand the what, why, and how around refinancing your underlying co-op mortgage, you are ready to begin. 

If you want to take the legwork out of the process and gain the expertise of commercial brokers, we at Aurum and Sharpe are ready to help. With many years of experience, we have the skills and knowledge to get your refinanced loan fast. 

We can help you prepare your loan package, gather required documentation, apply to several lenders to get the best price, and communicate with lenders on your behalf. 

If your board of directors has made the decision to refinance and you want to ensure you have the best experience possible, contact Aurum and Sharpe today. 

Mortgage Rates

Calculate Your Monthly Payment