37. Reasons for Mortgage Refinancing

If a building is held for any length of time, it often be­comes necessary or advisable to give a new mortgage. (Note, the owner borrows money and gives a mortgage to the lender). For instance, suppose that a syndicate buys a building for f 600,000, $200,000 cash and a mort­gage of $400,000. Suppose that the unpaid balance on the mortgage becomes due 10 years later. If at the expira­tion of 10 years, there remains $200,000 due on the mort­gage, the syndicate would not want to pay out that sum. To raise $200,000 the syndicate would have to ask the investors to pay in an amount equal to their original in­vestment, possibly as much as was paid out to them dur­ing the 10 years the syndicate was in existence. As a practical matter the syndicate manager cannot do that. He will rather try to renew the loan or get a new one and give a new mortgage.

Perhaps at the time of purchase, money was in tight supply and the interest rate was high. If the interest rate drops, it would be a good idea to borrow money and give a mortgage at a lower rate of interest and pay off the old one. There could also be tax reasons to refinance a mort­gage.

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