How to Get the Best Church Loan Rate
With interest rates at record lows across the United States, it’s tempting to look into getting a church loan right now. And it’s true: now is a great time to get a loan. There’s no doubt about that. But there are some things that you need to understand about the church loan market that may be different from the mortgage market you’re used to. Commercial mortgages (which includes church loans) play by different rules than residential mortgages. Furthermore, the best rate might not be the lowest rate: there’s a number of factors to consider when deciding what is “best”.
What’s the Difference Between a Commercial Mortgage and a Residential Mortgage?
Perhaps the biggest difference between residential mortgages and commercial mortgages (church mortgages) is the term vs amortization. The term is the length of time until the loan matures. The amortization is the payment schedule of the loan.
If you’ve ever bought a house, or looked into the housing market, you’ll probably think that the term and the amortization are the same. A home loan for 30 years has a 30 year term and a 30 year amortization. This means that you’ll be paying out 360 (30 years times 12 months) fixed payments. When the 30 years is up, the term is over and the amortization is complete, and now you own the home completely. The same thing works if you have a 15 year loan: it’s a fifteen year term and the amortization is 180 fixed payments over 15 years.
The big difference, and this is very important, is that in church loans (and commercial loans generally) the amortization and the term are typically for different amounts of time. The way this works is that you may have an amortization payment schedule where you pay a fixed amount every month as though the loan would last 30 years, but the term is only 15 years. Therefore, when the term comes up, you owe ALL of the remaining payments as a big lump sum. This is called a balloon payment. If you can pay off the loan at this point and make that balloon payment, then your loan is over and you own the church outright. If you cannot make the balloon payment, then you have to refinance which means getting a new loan.
This is the reason why we’re talking about terms and amortization before we even get to talking about interest rates: because when it comes to lower interest rates, shorter terms can get them for you (a 15 year term rate will be lower than a 30 year term rate) but you have to know that you can get stuck with that balloon payment at the end of the term and either fork over a lot of your capital or refinance for another loan.
That’s not to say that interest rates from short term loans are a bad thing. They’re just an important thing to consider.
Are Low-Interest Short-Term Loans Bad?
No. Not necessarily. As mentioned above, however, they have their pitfalls.
Think of this: every time you get a loan, there are closing costs. When you get your initial loan, there are closing costs, and when you refinance there are closing costs. These may get wrapped up into the total amount of the loan, but you’re still paying them. In other words, every time you get a new loan, you’re paying extra money on top of your monthly payment.
Likewise, when you refinance your loan, there’s no guarantee that the interest rate at that time will be as good as it is right now. If the rate right now is 4% for a 10 year loan or 5% for a 20 year loan, you might think the 4% is better, right? But what if, 10 years from now, the new interest rate is 7% or 8%? You’re stuck at that point; you’ve got to get a loan. But now you’re paying a higher rate than you would have if you’d gone with that 5% earlier on.
Another thing to think about is the amortization schedule. As you know, when you’re first making payments on a new loan, most of what you’re paying goes straight to interest, not to principal. The longer you pay on the loan, the less interest you’re paying and the more principal goes to pay down the debt. But, if you refinance, you’re starting back at the beginning: paying interest first and very little principal.
Finally, when you go in to refinance, you have to qualify again. Taking a short term, low-interest loan that you do qualify for might be a bad idea ten years down the road when times are a little tougher and it’s harder to qualify for a loan.
So How Do You Find the Best Church Loan Rate?
Well, you weigh the options. First, you look at where you are financially, and where you expect to be in the future. Be realistic; don’t look at the future with the best case scenario, but look at the future as numerous possibilities, any one of which could come true.
Balance the options between the best interest rate and the cautions mentioned above. Is a short-term loan really the best thing for you? If so, then lock it in and go forward with faith. If not, then go for a longer term loan with a slightly higher interest rate. It may pay off not only in the long term but in the short term as well, because longer-term loans typically have lower monthly payments, leaving you more room in your day-to-day budget.
And always, don’t borrow more than you can afford, even if the interest rate is great. Many people have been enticed by low interest rates only to regret the decision later, often with dire consequences. Remember that when you’re getting a church loan, most of that money is coming from offerings and donations, and you have a sacred responsibility to manage that money wisely.