The loan refinance process can be overwhelming and time consuming. However, a strategic refinance decision can take advantage of current low interest rates and save a church hundreds of thousands of dollars.
Start the conversation
"Deciding whether it makes sense to go through the process for a full application is easy if you're able to answer just a few questions," said Dan Mikes, executive vice president and head of religious institution banking at Bank of the West. "Pick up the phone and call an experienced church lender, and within 10 minutes of the conversation, they can tell you whether or not refinancing makes sense."
A church's current lender would be a good starting point for a loan conversation. The lender should be able to judge whether refinancing now is a good idea and what steps the church should take to prepare. "Always talk to your existing lender," said Abel Pomar, CEO of the Evangelical Christian Credit Union. "Talk to that lender as soon as you have the question, 'Should I refinance?'"
Typically, to refinance, a church will need to show evidence of financial health, which includes a certain amount of cash in reserve and stable attendance trends with regular financial support from congregants, Pomar said. Churches should also prepare to provide information on a church's total debt, remaining amortization duration, and the average tithe and offering income to calculate income-to-debt ratio. This will help the lender decide if it's possible to offer a loan to the church.
Interest rates hit historic low points this past fall, making refinancing an inviting option.
However, there are other reasons to consider refinancing—even if the interest rate is high, said Pomar. A church might want to refinance a 25-year loan into a shorter-term 10-year loan, or take another strategy to pay off a loan early and get out of debt.
"It depends on the goals of the ministry," he said. "It may have nothing to do with rates or maturity date, but the church board saying, 'Let's get out of debt.'"
Is it cost-effective?
While early payoff can be a good way to reduce debt, CPA Vonna Laue said that the key determining factor should be cost-effectiveness. "If a church wants to pay off sooner, it should determine if it's more cost-effective to refinance and incur the related costs or to just increase monthly payments and thereby pay additional principal amounts that will allow the current loan to be paid off in the shorter timeframe," said Laue, an editorial advisor for Church Finance Today.
If a church does decide to refinance an existing loan, Laue cautioned against one thing: extending the loan payment time in order to lower rates. "Extending the amount of time left until the loan is paid off may result in paying significantly more over time for the same principal amount," Laue said.
Study the fine print
Once a church decides to refinance, it's important to carefully review the financing offer letter to make sure the church secures the best interest rate and understands what's ahead. It's a good rule of thumb to ask about interest rates and get those rates specified in terms of a published index like the US Treasury or an Interest Rate Swap index, said Mikes. Lenders can offer different interest rates, so a church might also want to shop around to get the best loan offer for its situation, he said.
"Look beyond an initial rate," Pomar said. While interest rates may start out low, he cautioned that the terms of agreement could "escalate interest rates quickly" over time.
Churches and other organizations often forget that all of the loan contract—not just payments and interest rate—can be negotiated, said Laue. If a loan contract requires the church to complete a financial review within 90 days, for instance, the type of review or the deadline might be negotiable, making it easier to comply with loan requirements.
It never hurts to ask
If a church is uncertain about the value of refinancing, it never hurts for the church to discuss the possibility with a lender, Mikes said.
"Have the thought and conversation [about refinancing] early and often, because [interest] rates do move around and it's hard to predict that. There have been many opportunities especially in these last few years for churches to save a lot of money," he said. "A lot of opportunities are missed because of misperceptions of cost and benefit."