56 WINTER • 2012
www.carolinafirejournal.com
Carolina Fire Rescue EMS Journal
When it pays to refinance debt By Loren Pittman The decision to take out a new loan is usually a pretty simple process driven by the need for a new truck, equipment, a station renovation or development, or a real estate purchase.The loan process is pretty straightforward, too.You select the best rate, terms and payments to fit your budget. The decision to refinance current debt, however, is often more complicated.The reasons and benefits may be unclear, and you may not fully understand how to go about it.The tendency is to stick with what you know. Instead, take some time to consider refinancing. It may be the perfect solution for your department.
Reasons for ReďŹ nancing Although your department may have more specific reasons to refinance debt, some general reasons and potential benefits are: • Shorter terms, lower rates or both. • Lower payment obligations could allow you to prepare for a future project. • Reset to a lower payment amount after a large principal payment was made to provide future cash flow. • Get “cash outâ€? to purchase equipment or pay off other obligations with higher rates, such as unsecured
loans. • Move into a loan type that is more suitable for the department, such as replacing a variable or adjustable rate with a fixed rate, or converting a balloon loan into a traditional installment loan. • Managing funds responsibly may result in saving money that will free up funds for more up-to-date equipment and better resources.This, in turn, can impact the district’s ISO rating, provide lower insurance rates for the public and better fire protection for the community.
Old Rules of Thumb There are some traditional rules of thumb that have been used to determine whether or not refinancing debt is in your best interest.The rules advise you to refinance if: • The new rate is at least two percent less than your current rate. • You will stay in the new loan for more than five years. • You will make up the costs to refinance within a 31-month period. While these are good rules to consider, they are too general.You need to do a little more work to determine if refinanc-
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ing is in your particular department’s best interest.
Deciding Whether or Not to ReďŹ nance A good perspective to take when evaluating current debt is to think about what makes sense for the department now, as well as in the future. It’s also important to recognize that things don’t have to be done as they were in the past.Think of your department’s current loans and ask yourself,“If I had to borrow this amount today, would I take out a loan for the same rate, use the same collateral, and have the same terms and payments?â€? You need not use the same financial institution as in the past either. Request proposals from at least three lenders, and make your decision based on the best pricing and the lowest costs and fees. Also, have some Current Loan Information
consideration for the level of service you are provided, the ease of the loan process, and the amount of time and energy you will spend providing financial information to the lender (now and for the duration of the loan). As the borrower, you have the power to approach your loan officer with a plan you think will work best for your department. A good loan officer should work with you to help structure those plans into something beneficial for both the department and the financial institution. More than likely, your decision to refinance was spurred by the desire to lower your current rate and save money for your department. If you are considering refinancing to save money or any other reason, you want to be as costeffective as possible.There are quite a few calculators and
Loan #1
Loan #2
$26,596.36 6.50% $177,005.06 10 n/a
$16,502.28 6.25% $69,039.36 6 n/a
Payment Year
Annual Payment
Annual Payment
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
$26,596.36 $26,596.36 $26,596.36 $26,596.36 $26,596.36 $26,596.36 $26,596.36 $26,596.36 $26,596.36 $26,596.36
$16,502.28 $16,502.28 $16,502.28 $16,502.28 $16,502.28 $16,502.28
Payment Amount Current Interest Rate Remaining Balance Years Remaining Pre-payment Penalty
equations you can use to determine if refinancing is financially feasible, but one of the best methods is to compare the total payments for the duration of each term of the current debts to the payments of the proposed new debt on an annual basis. Factor in all costs associated with taking on new debt, as well as paying off old debt. Then, consider the time you plan on keeping the debt to full term versus paying it off early.
An Exercise in ReďŹ nancing Here is an effective way to determine if it’s worthwhile to refinance.This exercise will only be accurate if the principal on your loans has not been paid down ahead of your regularly scheduled payments. First, you will want to list all of the debts you want to refinance. You will need two basic pieces of information about your cur-
New Loan Information New Loan Amount New Rate New Term Maturity Date Fees and Cost of New Loan
New Loan #1
Total Savings
$246,500 4.50% 10 12/14/21 $3,000
$50,453.48
Payment Year
Annual Payment
Cumulative Annual Cost or Savings
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
$31,152.38 $31,152.38 $31,152.38 $31,152.38 $31,152.38 $31,152.38 $31,152.38 $31,152.38 $31,152.38 $31,152.38
$8,946.26 $20,892.52 $32,838.78 $44,785.04 $56,731.30 $68,677.56 $64,121.54 $59,565.52 $55,009.50 $50,453.48
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