Church Loan Article
Church Pay Down
Is it better for a church to pay down the mortgage or invest excess money?
For those churches fortunate enough to have money saved they can often find themselves struggling with what to do with it. This is not investment advice; consult a qualified investment advisor for specific advice. This article will cover two popular options and only on the surface.
- The Church Can Pay Down its Loan:
The positives a church should consider with this option:
- If their loan has a fixed interest rate, the church will receive a fixed rate of return on the amount of money they pay down on their church loan. In other words, if the interest rate on their church loan is 6% and they pay down part of that loan well then it has the same net affect as receiving a 6% return on the same amount of money.
- Very little risk of loss of principal or interest unless your church is foreclosed on or you sell your church at less than is owed on the property.
The negatives a church should consider with this option:
- By paying down your church loan, you loose the flexibility of having easy access to that cash if it is needed in the future. The only ways a church would be able to take the cash out of the property would be to sell it or refinance the loan. The compounded risk of this is if the church needs to borrow the money at a time when you do not qualify do to hardship or other reason. In other words, just because you were approved for the loan one time does not guarantee approval in the future. There are things we can do to offset some of this risk, like get a line of credit for the amount you are paying down the mortgage.
- It is not likely that your loan payment will decrease just because you pay down your mortgage. In other words, you will be paying down your principal at a faster pace while your payment will stay the same. You can request to have the payment recast and many times this will be approved, but it is not guaranteed. It is a good idea to check with an underwriter about the possibilities of recasting the payment, if this is a concern, before you pay down your mortgage
- The Church Can Invest the Money:
The positives a church should consider with this option:
- You retain control over your money, if you want to pay down your mortgage at a later date, you certainly can.
- If the church is able to invest its money wisely, the potential for higher returns exists.
The negatives a church should consider with this option:
- If the church invests poorly or becomes unlucky they could loose their principal.
- Returns could be lower than those that would have been effectively earned by paying down the church loan.
The reality of what is right for one church may not be right for another. The time horizon a church faces should be a big part of the decision process. For those churches looking to buy, build, or expand in the next 5 years they should consider the importance of having readily accessible cash. Cash is much more impressive to an underwriter than mortgage pay down. When in doubt, my philosophy is, keep the cash.
For those churches with no upcoming or known significant capital expenditures in the next 5 years then a program that includes partially paying down the mortgage is probably a good program.
In any event, it is a good idea for a church to have at least 6 months of expense reserves in a low risk type of insured account.
On average, we close over $100,000,000 a year just in church loans, making us one of the largest church financing companies in the country. Inc. Magazine ranked us the 49th fastest growing financial services company for 2008.
We have a really popular referral program: We pay ½% of the closed loan amount, up to $10,000 for every church loan that is referred to us. We do not have upfront fees and our rates and terms are very reasonable. You can expect a conditional approval in as little as 24 hours from the time we receive the completed application and last 3 years financial statements for the church.
