Dental Office Build-out Loan Term Questions

I received the following terms from a bank re: financing for build-out of a new dental office.

The proposed interest rates and the payments are as follows:

Term, Amortization Interest Rate Payment

5 years, 5 years 6.3% $9,736

7 years, 7 years 6.8% $7,498

5 years, 15 years 6.3% $4,301

7 years, 15 years 6.8% $4,410

I’m leaning towards taking the lowest interest rate and paying off the loan as soon as possible (option 1).

What would you recommend?

I recommend 7 yrs w/15 yr amortization.

If you can afford to pay it off in 5 years, the .5% diff in rate will barely be noticeable; however, if you run into cash flow problems that $4,410 payment will look SOOOOOO sweet compared to $9,736.

Do yourself a favor and give yourself the flexibility!

By the way, on $500k the .5% rate diff over 5 yrs is $9,731, or $1,946/year, or $162/month….after taxes would be $6,000/year, 1,200/year or about $100/month.

Are you saying 7yrs w/15yr amortization to it locked in for longer?

Yes, I know it’s the conservative approach, however, having seen two fairly new start-ups go belly up in the past year around here I’d want the option of the lowest monthly payment possible IF I need it to avoid bankruptcy. If the .5% diff in rate really bugged me I’d pay it off in 4 instead of 5…..if I could!

I am leaning towards the 5yr w/15yr amortization BUT only if there were no penalties for paying off early.

Is that based upon at least SOME hindsight with respect to how successful you’ve been with your practice?

My payments would be lower each month with the 5 yr/15yr amortization, so it would help me out over the next 5 years if I couldn’t afford higher payments.

I get that, though you’re locked into the balloon payment in year 5 and as you said, if you can’t pay it off in 5, you will likely pay a higher rate ASSUMING your’re successful enough to refinance. THAT could be an even bigger challenge if things don’t go as planned.

The only downfall to this approach is if interest rates increase in 5 years when I’m up for renewal (if I don’t end up paying it off over 5 years).

I’d try my best to pay if off in 5, even if I had to sacrifice a little each month. From the numbers I’d posted, I’d save over $200k in interest by paying it off in 5 vs 15.

Except that paying it off in 15 years isn’t one of the options you posted. If you could get a 10 or 15 year loan that may be an even better option depending on the interest rate.

That is why I’d go for a 5 year term (the cheapest interest), but have it amortized over 15 years so I have the option of drawing it out if finances aren’t working out well.

You won’t have the option (it’s the bank’s option if they’re feeling generous) of drawing it out if times are tough. In fact, if times are tough the lender will probably not want to refinance it and demand payment in 5. That could be disastrous. When they say “amortized over 15 years” they mean you get the monthly payment of a 15 yr loan; however, it’s a 5 yr loan so you have a LARGE balloon payment due at the end of 5 yrs.

BUT I’d insist on being able to pay it off in 5 with no penalties.

There’s no need to insist, with a 5/15 amortization loan he MUST pay it off in 5 years.

I totally misunderstood the 5 yr / 15 yr amortization thing. I thought it was just a regular 15 year loan, but the rate was only locked in for 5 years. Thus at the end of 5 years you would simply lock it in again at the going rate. Thus it would be advantageous to lock it in for a longer period (7 years) at a slightly higher interest rate, if you planned on dragging it out over 15 years AND rates were going to be increasing.

I thought so based upon your reply.

Heck, you may be right. Though when it says “term”-5yrs, “amortization”-15 yrs, I think it’s a 5 yr note using monthly p&i payments as though it’s a 15 yr note so a LARGE balloon payment due at the end of 5 years.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

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