To Refinance or Not?

When deciding whether or not to refinance, many commercial real estate owners ask themselves when will interest rates go up. However, that’s not the right question to ask. Interest rate timing isn’t the key determinant in deciding to refinance — IRR is.

When Will Interest Rates Go Up

Many owners use this question as a strategic tool to time their refinances. The idea is to only refinance right before interest rates go up, maximizing the amount of time that the investor benefits from the locked fixed-rate. However, this strategy has two distinct drawbacks:

  1. If the investor incorrectly times the market, he could end up refinancing at a rate that is above the market’s bottom.
  2. It leaves money on the table while an old higher-rate loan stays in place.

The Right Metric

Ultimately, the decision as to whether or not to finance is usually going to be based on one factor: whether or not refinancing increases an investor’s IRR. If, after accounting for the costs of a refi, the interest rate savings yields a higher return, refinancing is a good option. The only potential mitigant to

this strategy would be if the investor has a reason to believe that rates will be quickly moving down. Then again, in that instance, refinancing to an adjustable rate loan with a lock option or with low prepayment penalties could be a good strategy.

What It All Means

As of October 2013, most market indications point to being a good time to refinance. While rates are off of their recent lows, they’re still very attractive. Outside of the current market, the 10-year Treasury yield, which ended September at 2.64 percent, was last that low in 1955. The end-of-August 2.91 percent rate on 10-year swaps was also the lowest that it’s been, outside of the current market, since the Federal Reserve started tracking them in July 2000.

In other words, unless an investor thinks that interest rates will drop to the lows set earlier in the Great Recession and following recovery, they’re are probably as low as they will be. This makes the present market an excellent time to refinance, especially since the economy has more pressures to push Treasury and swap rates up than down.

Ultimately, the answer to the question “when will interest rates go up” is that they have already started. As such, the best time to refinance is likely right now.