Before applying for church mortgages, it is essential to check if your church can afford the cost of this loan. Although you look for the best interest rates right from the start, such church mortgages aren’t necessarily the best choice. Here, you need to answer if your church or your lender will carry the risk.
Also, you have to ascertain how much of your church’s income you can pay for a mortgage every month. All this boils down to calculating the real cost of your mortgage over time.
Here are the things that matter in this regard.
The Relation of Interest Rate and Risk
If the lenders assume lesser risk on loan, they are likely to offer low-interest rates as well. You can reduce their risk mainly by choosing a short-term loan. In this case, the lenders assume to receive their principal amount and interest within a brief time. Hence, they can easily allow a lower rate of interest.
Take, for example, a five-year balloon note that gives you five years for paying off your debt in full. Such loans are set up to make the remaining balance payable in full as a single payment at the end of the loan period. Here, your church carries high risk with a few choices.
You can pay the balance at the end of your loan, go for loan default, or apply for refinancing with a new loan. So, the loan term you choose and the corresponding interest rate determine your risk as well.
Fixed Rates May Have a Different Meaning
The definition of fixed rates differs for residential and commercial mortgages. As a church, you will get a business loan that comes with a different fixed rate. In residential loans, adjustable rates are not a favorable term, while commercial loans see flexible rates as a good indicator.
The fixed-rate mortgages that you see in residential lending have a different meaning in commercial lending. Therefore, the lenders offer fixed-rate church mortgages for terms ranging from 3-5 years. You will get a new fixed-rate for your next loan unless you pay the entire loan balance within this short term.
Since there is no cap on the increase in interest rates under these scenarios, this arrangement can be risky for your church. However, with long-term loans, the interest rates are adjusted several times, and your loan contract needs a rate cap to determine the extent of an increase in the interest rates.
If you want to get the best of both worlds, look for a lending company that offers convenient refinances set for a fixed rate over 3-7 years with an extended loan term ranging up to 20 years. In this case, the rates will adjust automatically after 3-7 years but will never surpass the rate cap.
Calculate the Total Interest Paid over the Loan Term
When you refinance short-term balloon loans several times, you may end up paying more money with each refinances. It includes the new rates of interest and amortization that starts over every time. As a result, you may end up paying more money to borrow the same amount. This is where you may go for long loan terms with adjustable rates.
Whatever options you choose, compare the costs of the loan and its repayments before making a decision. You don’t want to get into something that you’re unsure about.