The most common misconception that most Church's have about financing their project generally revolves around the loan terms that are offered by Christian Loan Lenders. Church financing is simply a branch of traditional commercial financing which offers a fixed rate term of one year to ten years and amortization schedules of 20 years to 30 years. Realistically, the only way to fix a rate for an extended period of time is through Church Bond Financing which will provide a fixed rate in excess of 20 years. However, even though this long-term fixed rate may be attractive due to a reduced risk of interest rate fluctuations this Church financing alternative is not cheap as one should expect to pay in excess of 5 points to obtain this type of Church financing.
I would like to explain the two most common types of Church financing terms as well as the advantageous and disadvantageous of each. The first I will call "Church Bank Financing". Christian loan lenders which are banks or credit unions will typical offer balloon type loans that have a fixed term of 3 to 7 years ( sometimes 10 years), and amortization schedules of 20 to 30 years. This type of Church financing will provide the best available rates and you should expect to pay between 1 and 1.5 points to obtain a Church mortgage loan. The major advantage of this structure are the low rates available while the disadvantage is because of the balloon the Church must either refinance or pay an extension fee to renew the loan after the fixed terms is over.
The second type of Church financing structure can be referred to as "non-bank" financing. This will be available from Christian Investment Companies that offer Church mortgage loans that are fixed from 1 year to 7 years, are fully amortized over 25 to 30 years, but have a 20 year term and no balloons. This means that the loan is fixed for a period but then readjusts for consecutive periods up to 20 years. The major advantage of this is their no balloon and the Church does not have to worry about refinancing or paying an extension fee. The disadvantage is that because of the reduced risks the interest rates will generally be be 100 basis points higher.
As you can see both types of Church mortgage loan terms have benefits and costs and the type chosen will depend on the flavor of the Church. One thing to remember is that regardless of the type chosen the longer you fix the rate the higher the rate will be.
To learn more about the available Church financing terms please visit me at churchfirstfinancial.org.
Long-term, variable rate loans
* 20 to 30 year church loans which allow the church to decide if they want a quarterly, annual, 3 year, 5 year, or 7 year rate adjustment period. The rate is fixed over the desired period and is then reviewed for a possible adjustment. Generally, there is both a period and lifetime interest-rate ceiling set by the Christian loan lender at which the rate cannot go beyond. The rates available on these loans are generally a bit higher then those available on balloon church loans but the church avoids the costs associated with refinancing when the balloon is due. In most cases these church loans carry no pre-payment penalty if paid-off with church capital or refinanced with the same lender. Borrowers should expect to pay the between 1.5 and 2 points to acquire this type of financing.
Fixed-rate, short-term financing
* 3 to 5 year fixed rate, balloon, church loans which give the church the option of 20 to 30 year amortization periods. These church loans are best suited for churches who want to take advantage of low interest rates and plan to retire the debt in 3 to 5 years through capital stewardship campaign gifts or other reliable means. We also recommend this type of loan for churches that are planning to renovate (or do improvements to) their facility in 3 to 5 years and will need to refinance and obtain additional funds at that time. Such financing is also appropriate for churches who have (or are planning) to sell their existing location but have yet to receive the monies from the transaction. The interest rate available on these church loans will typically be the lowest available and borrowers should expect to pay the lender 1 to 1.5 points for the financing. These loans generally only carry a pre-payment penalty if refinanced by an alternative lender.
Fixed-rate, intermediate-term financing
* 7 to 10 year fixed rate, balloon, church loans which give the church the option of 20 to 30 year amortization periods. We recommend intermediate-term financing to churches that like the safety provided by lengthy fixed rate funding and still want an adequate interest rate. Furthermore, these loans are great for churches that do not see themselves moving within the next 3 to 5 years and feel that they will not need any financing for renovation or improvement purposes in the near future. Typically, the interest rates on these loans will be 1 to 2% higher then those available on a 3 or 5 year balloon and the borrower should expect to pay the same loan points and pre-payment penalties as those mentioned above.
Construction loans convertible to permanent financing
* Through are lending partners we are able to provide church construction loans which convert to permanent financing once all loan proceeds have been used. This allows churches to avoid the process of seeking financing from multiple lenders, enables them to lock in guaranteed rates and terms prior to construction, and reduces the time spent preparing a loan package as only one set of documents are necessary. During the construction period the church makes interest-only payments based on the funds which have been disbursed. After all church loan proceeds have been exhausted the church construction loan is converted to permanent financing with the churches payment being based on the agreed upon terms prior to the construction period. Combining the two forms of funding means there is no re-qualifying, re-appraisals, or any additional closing costs.
Mezzanine financing with “turn-key” design/build services
* Often times churches need more construction financing then is available through traditional means to meet both current and long-term congregational growth. Church 1st has a program specifically designed for churches that need to maximize square footage while still being able to financially qualify. The program includes architectural and engineering services, church development services, accounting services, project management, complete ground up construction, a church capital stewardship campaign, as well as church construction and permanent financing. The program also has the unique aspect of converting all payments during construction into the permanent church loan which allows the church to avoid payments while their facility is being constructed. Churches can generally put as little as 10% down and can qualify for 30% to 40% more then what would be possible through a traditional lender. To qualify for the program churches must meet at a minimum the following requirements; own land or be in the process of purchasing land, have annual income that exceeds $60,000, be in existence for more then three years, and be incorporated as a 501 (c) 3 organization.
Fixed-rate, long-term bond financing
For churches interested in 20 to 25 year fixed-rate financing we have a number of partners which will provide church bond financing for your churches project. Church bond financing can be used to facilitate the financing of real-estate transactions including purchase, refinance, construction, and renovation. The bonds are sold to both internal and external investors looking for a fixed return over their holding period. In general, bond programs do not have a pre-payment penalty, require no personal guarantees, and allow the funds to be used for almost any purpose. The major disadvantages of a bond program are the high fees, the length of time it takes to close and the required paperwork which often includes audited financials and a certified appraisal of the collateral.
