Refinancing in a rising-rate environment

For the past 14 years, we’ve been experiencing near-historic low rates, and it appears those days might soon be gone as rates have risen over the past several months. 
The wonderful news? Many churches were able to take advantage of the low rates either by refinancing, purchasing a new property, or renovating or building a new sanctuary to expand their ministries’ reach within their communities.

David Lee, Sr.
Senior Relationship Manager
Thrivent Church Financing

Difficulties and challenges have never deterred churches from pressing towards Christ’s call “to go and make disciples of all nations, baptizing them in the name of the Father and of the Son and of the Holy Spirit.” (Matthew 28:19) Rather, churches have always adjusted, become more creative, resilient and determined. We don’t need to go back further than March of 2020 and the onset of the pandemic to be reminded of this.

Rising interest rates are simply another hurdle that we all — including us, as church leaders — will have to adjust to. This might include having to refinance your church loan earlier than planned — there might not be an alternative. The subject of refinancing has typically been reserved for when borrowers are looking to lower their interest rate and save money; however, there are situations which warrant refinancing at higher rates; here are a few of them:

Rate adjustment/reset

Carefully review your loan documents to see if your loan has an upcoming rate adjustment or rate reset in the next several years, as well as its frequency. If your rate adjustment is occurring every three to five years, you are exposing your loan balance to paying higher interest if rates continue to rise at every reset period. For every 1% increase in your rate, your ministry could be paying an additional $10,000 in interest annually for a $1-million loan balance that could otherwise be reinvested back into your ministry programs. Just imagine how many additional missionaries your church could support or how many youth you could send to summer camp on scholarship! 

One way to mitigate this risk is to find loan options that can reduce or eliminate the frequency of adjustments through longer terms (10-, 15– or 20-year fixed rates) or with fully amortized loans.

For every 1% increase in your rate, your ministry could be paying an additional $10,000 in interest annually for a $1-million loan balance that could otherwise be reinvested back into your ministry programs. 


Loan maturity/balloon 

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Again, review your loan documents to see if your loan has an upcoming maturity or balloon; this is typical for most church loans. If your loan is maturing in the next one to three years, you will have to refinance upon maturity. So, in a rising rate environment, it might make sense to refinance prior to your maturity date, even though it might mean you’re refinancing at a higher rate. 

Before you do, be sure to check if your loan has any prepayment penalties or SWAPs tied to it, as this could factor into your decision. Most traditional church lenders will have a loan term around 10 years; so if your loan was amortized over 20 or 25 years but has a term of 10 years, the remaining outstanding loan balance at the end of the term is due in full. Unless you have the cash to pay off the outstanding balance, your ministry will have to refinance at the end of the 10 years or term period at the prevailing market interest rate, resulting in your church needing to requalify and incur additional fees (loan origination, appraisal, title, and so on). One way to mitigate this exposure is to find lenders that offer, long-term fully fixed rate loans with competitive rates and fees. 

Refinancing at higher rates really has one primary objective: to reduce interest rate exposure for the church — which is still very much a stewardship decision. Although this might not be the most popular and well-received topic at your next board meeting, it just might be at the top of the list before rates increase even more. 

Get ahead of the curve

It’s wise to be proactive in managing your loan decisions rather than waiting for an event to force your church to respond. As we emerge from the COVID-19 pandemic, we’ve seen many churches become financially stronger than ever, with stronger balance sheets and stable-to-growing giving, along with controlled expenses. All this begs a thought: your church might be in the best position today, financially, to refinance and secure a long-term fixed rate.

Thrivent Church Financing is in active discussions with multiple church leaders across the country that have recognized this risk and are considering this very decision, with some churches considering refinancing — potentially at a higher rate and even though a couple years ahead of its maturity — for the very reasons I’ve shared.

As the saying goes, “Only three things are certain — death, taxes and Christ’s return.” Although we don’t know what the future looks like for interest rates, please don’t shy away from investigating your options with an experienced church lender. 


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