One of the silver linings from the pandemic’s impact on the economy are the historically low interest rates. Due to concerns about the stability of the economy, most financial institutions have adjusted their traditional credit evaluation and standards. Because of the relatively low interest rates, now could be a good time for community associations to obtain or refinance a loan.
HOA loans can help fund capital improvements and projects in the community—from common area improvements, to maintenance and repairs. Typically, HOAs utilize loans as alternatives to a special assessment for unexpected expenses. HOAs can also use loans for pay annual insurance premiums up front—which is especially beneficial if the insurance company offers an incentive for paying in advance.
Additionally, loans allow HOAs to spread out the cost of common area improvements over time, while also allowing repairs and maintenance to be performed in a timely manner at today’s prices.
With historically low interest rates, now is a good time to reevaluate current loans and see if a refinance would be beneficial for your community. The biggest advantage to refinancing is lowering the interest rate, which can have an incredible effect on monthly payments. Long term, this strategy could save the association hundreds (if not thousands) of dollars each year.
There are a few types of loans that are pertinent to HOAs:
Term loans are a type of loan where the funds are taken at loan closing and the monthly payment is fixed, usually ranging from three to 15 years in length. Term loans are typically utilized for capital improvement projects, deferred maintenance, property acquisition, reserve replenishment initiatives, refinancing existing loans, common area improvements, and construction defect repair.
Non-revolving lines of credit are a type of credit where HOAs are required to pay interest on the borrowed balance. These lines of credit are typically shorter term (approximately 12 months) and are converted to a term loan before or at maturity.
Emergency lines of credit are typically used for disaster relief. Instead of having to wait for insurance funds to arrive, HOAs can make any necessary repairs in a timely manner, and then pay back the loan once the claim has been paid. Interest would only be paid while waiting for insurance funds.
If an association enters into a loan agreement, it is important to determine what method will be used for repayment. For smaller loans, HOAs could utilize an increase in monthly assessments. For larger loans, HOAs could create a special assessment that would allow each owner to pay up front or participate in the loan program. In both situations, transparency is key and board and homeowner approvals must be considered.
Loans provide financial relief to associations with unexpected expenses and lessen the burden to homeowners. If your association could benefit from a new loan or refinancing an old, now may be the time to get a historically low rate.