Tips in dealing with your banker
Learn from the tips in these continuing articles.
Tip No. 15 – Get new money on existing loans
On a real estate loan, you can’t get new money after the loan is fully funded in most states. Let’s look at what that means. Say you get a $500,000 loan and it funds. You make payments for 3 years, leaving a balance of $350,000. Now, even though you have paid off $150,000, you can’t go back and get $150,000 in “new money.” The only way to get that $150,000 is to take out a new first lien loan or a second lien loan with all the accompanying fees and costs.
If you want to get revolving money on a real estate loan, take the proceeds and pledge them as collateral on a line of credit (LOC). Then you can pay and borrow, pay and borrow, etc. An additional huge benefit is that most LOCs are only for one year, but this one will always be renewed – so long as the collateral is healthy.
Tip No. 16 – Earn interest on your collateral
When you use cash as collateral for a loan, have the bank pay you whatever it wants on the CD and charge you one point more for your loan. That way, the loan is costing you only one percent, because the bank is essentially paying you interest on the collateral.
In addition, when you use a CD as collateral on a loan, consider where you want the interest from that CD to be paid. Often it’s added back into the CD, which will increase the interest you receive, but then it can’t be used to go toward the interest you’re paying the bank. Consider having that interest paid into a money-market account, then using it to make the payment on the loan that the CD secures.
Tip No. 17 – Watch for prepayment penalties and hedges
Check your real estate loan documents carefully. Laws vary by state, but in many, the lender can charge you a pre-payment penalty if you pay your loan off early. This can be a pretty big fee, so think carefully before agreeing to it.
Also, banks may hedge or match fund your loan. That means they “match” your loan with a funding source, or hedge it in the markets that the rate won’t go up or down too much to protect their exposure on rates. It’s pretty complicated (too complex to explain fully here, but just ask if your loan is being hedged or match funded and what the implications might be to you). They may insist on a pre-payment penalty because they can’t “unwind” the hedge or match funding without a penalty. For instance, if you are paying seven percent interest, and you pay it off early, they may be in an environment where they can only loan the money at three percent, so they want to be made whole or not have the risk associated with the difference.
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Ron Sturgeon is past owner of AAA
Small Car World. In 1999, he sold his six Texas locations, with
140 employees, to Greenleaf. In 2001, he founded North Texas
Insurance Auction, which he sold to Copart in 2002. In 2002,
his book “Salvaging Millions” was published to help
small business owners achieve significant success, and was recently
reprinted. In June 2003, he joined the new ownership and management
team of GreenLeaf. He also manages his real estate holdings and
investments. You can learn more about him at WWW.autosalvageconsultant.com
He can be reached at 5940 Eden, Haltom City, TX 76117, firstname.lastname@example.org or
817-834-3625 ext 6#.