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Loan refinance for settlement will save money

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Trustees say that a complicated refinancing of an existing loan needed for $175,000 to pay a settlement with Upper Surface Creek Domestic Water Users Association (USC) will save money in the long run. However, payments will increase significantly in the near term because the proposed deal which carries a low rate also has a shorter payoff period.

The original USDA Rural Development loan has a 40-year term. The town has discussed a 30-year refinance deal. A commercial bank lender in the negotiations prefers a 20-year term with a 10-year renegotiation caveat, town officials explained.

The town's financial move is comparable to a homeowner refinancing his 30-year home loan, taking cash out of equity and rolling the new balance into a 15-year mortgage.

Trustee Ray Hanson said he was concerned that the public wouldn't understand the complicated deal or appreciate possible savings, projected to be in excess of $400,000 over 20 years. However, a low 2.99 percent interest rate is guaranteed only for 10 of those years, trustees noted. After 10 years, the loan would be renegotiated at interest rates available at that time.

Though the $175,000 is to buy water system infrastructure currently owned by USC, the initial $175,000 payment to USC will come from the town's general fund. If the $175,000 payment were taken directly from water fund, cash reserves there would drop to just $99,023, according to town budget figures.

(For comparison, Orchard City's town board sounded alarm bells when its water fund reserves dropped to $1 million.)

The deal requires that the water fund repay the $175,000 to the general fund, money that ultimately will come out of water rate payer's pocket. A study now underway by the town is expected to show that an increase is needed in the town's sewer and water rates.

The $175,000 settlement payment to USC was determined through court-ordered mediation.

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Surface Creek
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