Refinance - Yes or No?

[ruleof72]

This is not your typical refinance question but there are a lot of smart people here. I'll try to list all of the pertinent info in the first post so here goes:
-Commercial real estate
-Currently 7 years into a 20 year amortization, balance 2.176 million
-Note #1 balance 976K, 6.5% fixed for next 13 years
-Note #2 balance 1200K, 6.625% fixed for next 3 years, then resets
-Proposed note 5.15% interest for entire balance fixed for 5 years, then resets. Option for 13 year amortization or 15 year amortization.

To refinance we would incur 30k prepayment penalties and 17k closing costs.
If we wait 1 year the prepayment penalties drop to around 15K, 2 years they drop to 5K, and in three years there are no prepayment penalties.

With the proposed note and keeping the same 13 year length our payment would drop by around $2500/month.

And there is a kicker - Refinancing would free up a life insurance policy that is no longer needed. Our annual premiums are 16K but the cash value increases by roughly the same amount. The cash value is currently about 140K and we would like to cash it in.

So here are my options
1 - Refinance now at the lower interest rate
1A - Refinace at lower rate to 15 year term
2 - Wait a couple years to avoid the prepayment penalties but who knows what the interest rate will be
3 - Do nothing, keep the current notes because 1 is fixed for the remainder of term

So what do the folks formerly of MSN money think?

[qofcc]

1A - Refinance at lower rate to 15 year term

option 1 would be OK too, but less flexibility on the minimum payment, which you might need if interest rates jump
option 2 is taking a gamble that interest rates will remain low and that seems unlikely
option 3 would make sense for note#1 if you have the option of only refinancing note#2, but you didn't present that as an option.

[Deleted]

With a $2,500 savings first thought is that between this year's pre payment and closing costs ($47k) it's going to take 19 months to recoup the refi costs. Not bad.

5.15% for 15years is a great commercial rate.

[ruleof72]

Thanks for the responses. I thought about refinancing only the 2nd note but the life insurance policy is pledged to the first and I would really like to cash it in. The lender won't release the policy because......well because they don't have to.

And I was wrong on the $2500/month lower payments. Continuing with a 13 year amortization the payments drop by $1700/month. Switching to a 15 year schedule the payments drop by $3500/month. So it would take 14 or 28 months to recoup the closing costs depending on the term.

[DVM gone riding]

What happens in 5 yrs when the rate restes? Are you going to save the 140k insurance policy and set aside the 3500 extra/mos in some sort of acct?

Lets see 5x3500x12=210k+140k=350k So that should be enough to buy down to a decent rate if they go sky high, totally ignoring int etc. I think option 1a makes sense.