Saturday, June 02, 2007

Fractional Loan Grrrrr

Has it really been two weeks since my last post? That's what a new job will do to a blogger. Anyway, in the midst of immersion into my new position my group has been wrangling with the bank about our fractional loan applications. The way it shakes out even the best of us - those with extraordinary 800+ credit ratings, long time employment with stable entities like the federal and local government, a low loan to value ratio on our property, and a perfect seven year payment record on our current mortgage - are being offered the following:

5/1 ARM
7.25% interest rate
30 year ammortization
1 year LIBOR index
2.25 margin
5, 2, 5 loan cap
3, 2, 1 prepay penalty

The estimated fees for a $300,000 loan are about $5,500, plus a $400 appraisal charge and legal fees for updating our TIC agreement.

When I average the $6,000 in fees over five years the loan is costing me $100 a month more than the face value of my new monthly payment. That puts me just about even with what I am paying now on an assumable group loan, interest only note. And in five years if we don't condo convert I will be forced to either pay for another round of refinancing or pay exorbitant rates attached to an ARM. (Of course with a fractional paying the loan down is another very appealing option. But for purposes of this discussion I am assuming most TIC owners do not have large cash reserves for a big paydown.)

The bottome line is there is no financial incentive to convert our building to a fractional loan. W are simply paying for the privilege of gaining some liquidity. The value of increased liquidity is such that most of the people in my group would go forward with this scenario. However, we have a person in the group who is not as stellar as the rest of us from the underwriter's perspective. And that person is being offered loan terms that are significantly worse than those we have now. So either the bank is going to have to negotiate with us or we may decide to scuttle the deal and try again in six months or a year.

This aspect of TIC ownership is emotionally very difficult for some of the people in my group. Most of us are successful, hardworking, mid-career individuals who in any other scenario would qualify for the best possible rates and terms the market has to offer. Because we own a TIC we are being offered the kind of deal that gets handed out to high risk borrowers.


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