Co-ops plan ahead with early rate lock option.

For a cooperative property holding a mortgage with a large prepayment penalty, the opportunity to benefit from borrowing at today's desirable interest rate levels has not been a viable option.

Such a property has been sidelined, biding time until the prepayment window opened.

Now, cooperatives have another option to bypass this obstacle and take advantage of current interest rates, thanks to early rate lock programs, like the one offered by NCB.

Early rate locks or forward commitments are lender agreements that allow cooperatives to secure a desirable interest rate, yet delay closing until the pre-payment window has opened. NCB is now signing commitments with cooperatives for up to 12 months in advance to guarantee these better rates.

Market indicators are pointing to an uptick in interest rates in the months ahead, so locking in a loan at current rates, which are still low this spring, is an attractive strategy for New York area housing cooperatives.

Fiscally savvy cooperatives are borrowing for a variety of reasons. Some boards are taking out loans to underwrite necessary capital improvement projects and avoid the unpopular route of tapping into a building's reserve funds. Others are refinancing their existing debt to achieve less expensive funds at a lower interest rate.

For many Boards of Directors, the early rate lock option is just the opportunity they've been waiting for. Recently, Board members of a Manhattan cooperative were preparing to tackle a number of big-ticket capital improvement projects. But their existing mortgage disallowed any additional financing, or refinancing, prior to October 2007.

This was cause for concern because an increase in interest rates would put them in an uncomfortable financial bind. They would not be able to refinance the mortgage and also borrow adequate funds for necessary, but expensive, renovations. It increasingly appeared that the undesirable step of increasing their shareholders' monthly maintenance fees was the only path open to them.

The NCB rate lock program has enabled the cooperative to secure a mortgage at the currently low rate of 5.6 percent and move ahead to schedule the improvement projects, while avoiding any special assessment. When the loan closes in October of this year, they are positioned to launch the necessary work on the building without further delay.

A similar scenario played out at a Long Island cooperative holding a $12 million first mortgage with another bank at a hefty 8.29 percent interest--a sizeable rate compared to current rates. The mortgage pre-payment window did not open until February 2008, effectively blocking any move to borrow funds now. Rather than wait almost a year to begin the refinancing process, the Board of Directors decided to contact NCB and ultimately locked in a loan through the early rate lock program at a reasonable 5.5 percent interest rate.

The Board knew they had done the best due diligence to secure attractive financing. With a reasonable rate locked in, the cooperative avoided the large financial penalty that would result from pre-paying its existing mortgage. At the same time, the Board has secured the building's financial health for the foreseeable future, even if rates should rise during the coming year.

For other Tri-State area properties in positions similar to the Manhattan and Westchester cooperatives, the early rate lock option is an excellent opportunity to secure today's great financing, while ensuring the solid financial health of the building in the years to come.