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WOJTOWICZ: Lots to consider when weighing mortgage payoff

June 21, 2013

Q: The old saying “cash poor, property rich” may apply to me. I own a small manufacturing business in a building that we borrowed to buy years ago. But my interest rate is too high, and the monthly payments take a large chunk of money.

I think that if I paid off my loan early, I would have more cash to spend on the business. On the other hand, paying off my loan would require a big outlay from current resources and I would have to delay buying a couple of machines that I need to keep up with technology in my industry.

This is a tough one for me. Do I continue to pay on my mortgage loan or suck it up, pay off the mortgage now and have more cash to buy machinery upgrades in a few months?


A: You didn’t tell me the number of employees in your company, nor did you disclose your industry, but you refer to your company as a “small” manufacturer.  Whatever your number of employees, keeping and expanding your market share in your industry is crucial to them and you, meaning that you need to maintain your company’s technical capabilities.

(I realize that technology comes at us at dizzying speed and we are well-advised to pick-and-choose our upgrades rather than jump at the “next greatest thing” to come down the road.)

Given all this, here are a few thoughts to help you make your decision to pay off, versus keep paying, your mortgage:

What is going on in your business right now? What cash needs are most immediate? Can you stand pat on equipment purchases for a few months? Does your building need maintenance that would require a major expense? Will new rules for employee health insurance change your cash flow? In other words, is there currently a major need for spending?

Is there a possibility of a new account in the next few months that will require you to buy a major piece of equipment? Could you handle a big purchase with cash in hand? Or could you finance new equipment at a lower interest rate than you are currently paying on your mortgage?

It is very tempting, and understandable, to complete your obligation to a mortgage lender, or any lender. (I’m assuming here that you will not be hit with a prepayment penalty or a large payment at the end. Either would dramatically impact your calculations.)  
You certainly don’t want to keep paying a mortgage if it restricts your business in other areas. But you don’t want to cough up too much at once and have the same effect. You want to move forward without slipping into reverse.

Generally we recommend matching the term of the financing with the life of the asset.  Paying off your building (a long-term asset) may restrict the amount of money you have available for other needs like purchasing equipment (generally assumed to be a five- to seven-year asset).  

If you are concerned about the cost of your mortgage, you might consider refinancing it to lower your monthly payments and then have more money available to grow the business.

Talk things over with your banker, financial adviser or CFO (if you have one). Be honest about your company’s position and prospects. They may suggest another alternative.

And when you make the decision, do what feels right for you and for your employees.

Good luck!
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Wojtowicz is president of Cambridge Capital Management Corp.

 

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