The SBA has announced a significant fee reduction and adjustment to the 504 program fees on all SBA-504 approvals starting October 1st. The fee cuts will save the average SBA-504 borrower $118 monthly or slightly less than $13,000 over the life of the loan. While it may appear strange the way SBA is doing it (raising one upfront fee, but dropping a larger ongoing fee), it is still good news for the small businesses who use the program. We will use our average $600,000 SBA-504 second mortgage amount in the below example to explain the fee reduction:
First, SBA is reinstating the upfront guaranty fee on 504 loans that is financed into the 504 loan. This fee had been eliminated years ago. It is going from zero back to its previous 50 basis points. On a $600,000 loan (which is our average), it adds $3,000 in adjustment fees that are financed into the 504 upfront and paid over time in each monthly payment. SBA will now be able to take that $3,000 fee upfront versus overtime. It adds about $18 per month to a $600,000 SBA-504 loan.
Second, SBA then more than offsets that by significantly reducing the ongoing monthly servicing fee that is paid to SBA to keep the program at zero cost to the taxpayers (credit fewer defaults and a strong economy). The ongoing fee drops from .642% to .368% effective October 1st or a drop of .274% (27.4 basis points) that will be removed from each monthly payment the borrower makes. On the same $600,000 average loan we make, it cuts that ongoing fee that is added to each payment and paid to SBA from $321 per month down to $184 monthly.
The net savings is $118 per month on a $600,000 SBA-504 second mortgage or $12,744 over the average 9 years an SBA-504 loan is outstanding. It is expected the effective rates will drop as a result of the above. This is just more good news surrounding the 504 program. With approvals just taking days and low, 25-year fixed rates now available, there has never been a better time to use the SBA-504 program.