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If you currently have a business loan or SBA loan but aren’t crazy about the loan’s rate, term, or outstanding balance, you might want to consider paying it off by pursuing a conventional mortgage cash-out refinance loan. Doing so can save money and simplify financial matters. But this move can also put your home at risk and lead to higher costs than you expect.
Take the time to better understand what’s allowed here, the benefits and risks of this strategy, ideal prospects, and what’s involved with the process.
Why consider refinancing your business loan?
If your business loan or Small Business Administration (SBA) loan is hurting your bottom line or not aligning with your business goals or timelines, it might be time to ponder a different route. You could attempt to refinance the loan into a new business loan, especially if doing so can yield a more preferred rate and terms.
Or, as an alternative tactic, you can pay off some or all of your outstanding business loan debt via a cash-out refinance of your home mortgage loan. Here, you tap into your home’s accrued equity and cash it out at closing, taking those proceeds and paying down your existing business loan.
Consider that the current interest rate for an SBA 7(a) loan is as high as 11.5% to 15% (3% to 6.5% higher than the current prime rate of 8.5%). The average fixed interest rate for a conventional mortgage cash-out refinance loan, meanwhile, is around 7% – between 4.5% and 8% lower.
Pros and cons
Paying off a business loan or SBA loan by using a conventional mortgage refi can be beneficial for several reasons, according to Dennis Shirshikov, a finance professor at City University of New York/Queens College.
“First, you may be charged a lower interest rate on a home mortgage refi loan than you’re currently paying for your business loan, thereby reducing monthly payments and overall costs and freeing up cash flow for other business needs,” he says. “Also, you can save money via possible tax benefits from mortgage interest deductions if you qualify.”
Additionally, it can simplify financial management by consolidating debts into one payment. You’ll no longer have to make separate monthly payments to both your business loan and your mortgage loan.
Furthermore, you can opt to shorten or lengthen your repayment period.
“Extending repayment terms can lower monthly payments, making it easier to manage cash flow. However, it may increase the total interest you pay over time,” says Andrew Latham, a certified financial planner with Supermoney.com.
Case in point: If your current mortgage loan has 20 years to go but you refinance to a new 30-year loan and take cash out at closing to pay off your business loan, your new monthly payments may be less; but you’ll be adding 10 years to the home loan and will probably pay thousands more in total interest over those 30 new years.
Perhaps the biggest downside to opting for a cash-out refi of your home loan to pay off your business loan debt is you’ll be required to use your home as collateral. That means you risk losing your home if you default on the loan.
Another caveat: There’s the hassle and expense of proceeding with a loan refinance, which will involve paperwork, patience as you await an underwriting decision, and closing costs that can average 2% to 5% of your loan amount.
Joe Camberato, CEO of National Business Capital, a national fintech lending marketplace for business owners, isn’t a fan of refinancing your mortgage to pay your business debt.
“I don’t recommend mixing your business loans with your home mortgage. It’s important to keep your business finances separate from your personal assets,” he says. “If you’ve managed to secure a business loan or SBA loan, it generally means your business can support itself and should continue to do so without tying it to your home. Your business should be self-sufficient and handle its own debt.”
Good candidates for this strategy
Ask Jeffrey Zhou, CEO and founder of Fig Loans, and he’ll tell you that this approach is best for business owners who have substantial home equity built up.
“They can leverage their home’s value to secure better loan terms,” explains Zhou. “Candidates should also have stable, predictable income streams. Consistent income ensures they can manage their loan payments without financial strain. This approach also works best for those who can project their financial stability confidently. Remember, too, that lenders will look more favorably on applicants with excellent credit histories.”
A home mortgage cash-out refi is also particularly appealing for borrowers facing high interest rates on their business loans or those seeking to improve cash flow.
The Steps Involved
Eager to explore a cash-out refi and eliminate your business loan? Here’s what the process will likely entail:
- Evaluate your home equity. Determine if you have enough equity in your home to qualify for a cash-out refinance and cover the business loan debt you want to pay off.
- Check your credit score and review your credit reports. “Ensure your credit meets the requirements for a conventional mortgage. The minimum credit score lenders will look for is typically 620,” Shirshikov says.
- Shop around among different lenders and compare cash-out refi loan offers, getting several rate quotes.
- Get a professional appraisal to confirm your home’s market value, which the lender will likely require and charge you for.
- Submit a cash-out refinance loan application with your chosen lender.
- Wait for an underwriting decision, which may take a few weeks.
- Get approved and close on the loan. “Prepare to pay closing costs and sign the new mortgage agreement,” continues Shirshikov.
- Use your cashed-out funds to pay off some or all of your outstanding business loan debt.
Expect the entire process to possibly take 30 to 60 days. This length will depend on many factors, including your creditworthiness and the lender you choose.
Alternatives And Final Considerations
A cash-out refi isn’t your only option here. If you want to get rid of that small business loan, or at least reduce its balance, ponder these alternatives:
- Refinance to a new small business loan/SBA loan or apply for a small business line of credit. This choice doesn’t put your home at risk or require resetting your home mortgage.
- Pursue a home equity loan or home equity line of credit (HELOC). Either option involves liquidating home equity and using your home as collateral, but you may pay a lower rate than you would with a business loan refi.
- Explore a private secured (requiring collateral) or unsecured (signature required only) loan. These loans are relatively easy to secure but could charge much higher rates.
“Consider the costs associated with any of these options, including closing fees, and evaluate the long-term financial impact to ensure it aligns with your business goals,” suggests Latham.
Also, crunch the numbers carefully.
“Consider potential interest rate changes and fees. Refinancing may lower your interest rate, but it could come with higher fees and closing costs,” cautions Zhou. “Always compare total loan costs before committing.”
Lastly, think about your long-term personal and business financial stability.
“Consult with a trusted financial advisor to avoid common pitfalls and ensure your decision aligns best with your financial goals,” adds Shirshikov.