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The best way to shop for something new is by comparing it to what you already know. When it comes to loans, people are usually most familiar with residential mortgages. A church, however, is considered a commercial enterprise so it requires a commercial mortgage. Unfortunately, commercial and residential loans are not apples to apples. To make the best financing decision for your ministry, it is important to understand the key differences between these two types of loans as well as be familiar with common loan terminology.

Understand the Product

Let’s start with two key variables: term and amoritization. The term of a loan is the length of time until the loan matures. The amoritization is the payment schedule of the loan. With a traditional 30-year residential mortgage, the amortization and the term are both 30 years. That means your payments are scheduled out over 360 monthly fixed payments, or 30 years (the amortization), and you also have 30 years to repay the loan (the term). With a 15-year mortgage, your payments are scheduled out over 15 years, and you have 15 years to repay the loan. On a commercial mortgage, however, the amoritization and term are usually different amounts of time. When the term is a shorter amount of time than the amoritization, your scheduled payments will not equal the full amount of your loan. Instead, the entire remaining balance of your loan will be due at the end of the term. This is referred to as a balloon payment.

Many churches do not have the cash on hand to pay the remaining balance, or balloon payment, so they get a new loan to refinance the remaining balance. This is when other factors such as interest rate and closing costs come into the equation. 

Don’t Shop Rate Only

With both residential and commercial mortgages, the shorter the term the lower the interest rate. A 15-year residential mortgage is generally lower than a 30-year, etc. For commercial/church loans, most banks and credit unions offer terms as short as 3 or 5 years. These low terms can have extremely enticing interest rates. However, they can also end up costing your church more in the long run. 

Here are some hidden costs behind refinancing a balloon note:

1. You have to pay closing costs such as any origination fees and third-party fees like appraisals and surveys to borrow the same money you already financed.
2. Your new loan will be subject to the interest rate market at the end of your term. You have no guarantee or cap on how much your rate may increase with the new loan, and there is no way to predict future interest rates.
3. You start over with interest payments. The bulk of the interest is generally paid at the beginning of a loan, meaning you will again be paying much more interest than principal with each payment.
4. You must qualify for the new loan. If there are changes in your property value, revenue, personnel costs, etc., you could find yourself in a different situation than when you borrowed the money the first time. In unfortunate cases where a bank can’t or won’t refinance a church loan, it leaves the church scrambling to find someone else to lend them the money they need so that they can keep their property.

Tips and Best Practices

1. Don’t shy away from an adjustable rate.
   The benefit of an adjustable rate loan in the commercial mortgage market is that you know up front how high your rate is allowed to go. Plus, you have a more consistent rate and longer period of time to pay off the entire balance of your loan.  While many banks refer to balloon notes as “fixed rate loans,” this is somewhat deceiving. While “fixed rate” has a positive connotation in the residential market when the loan term is 15 or 30 years, on a 5-year balloon note the rate is only fixed for the 5-year term. 
2. Don’t borrow more than you can afford.
   Only consider your tithes and offering income when determining how much your church can afford to borrow. Designated income, such as missions and benevolence, should not be used to pay your mortgage.
3. Borrow for the longest period possible.
   Having a longer amortization schedule (and therefore lower payments) can give you the flexibility in your budget for cash flow fluctuation. No matter how accurate your projection, some months your income will be lower than others. Don’t let your ministry suffer because you’re committed to a larger loan payment.
4. Pay off your loan as quickly as possible.
   Some months your income may be higher than expected. Use that extra cash to pay down your debt. As you shop for loans, make sure you don’t have a prepayment penalty so that you can take every opportunity to make extra principal payments on your loan and save your ministry money on interest in the long run.
5. Mitigate the long-term risks to your ministry.
   It is important that we are wise stewards of the ministry and resources God has entrusted to us. You can’t afford to look at the future of your ministry in 5-year increments. To avoid incurring the costs and risks of refinancing every few years, look for a loan with a longer term rather than a shorter term.

As you search for the financing solution that is best for your ministry, we invite you to contact us to discuss your options. Call 888.599.6015 to set up a time to speak with a loan consultant.