Suppose you were paying a 4.91 percent interest rate on your home mortgage and someone came to you and offered you a mortgage at 2.04 percent? If you had a hypothetical $150,000 mortgage, this would lower your monthly mortgage payment from $797 to $547 and save you $90,000 in interest costs over the life of the loan.
Would you do it? Most of us would see this as a wise financial decision. Granted, there will be some costs associated with refinancing, but that cost will be a very small percentage compared to the total savings of $90,000.
The City of Cottonwood took advantage of just such an opportunity last year by refinancing bonds issued in 2004 to purchase the private water companies. At the direction of the Cottonwood City Council, staff is now working on refinancing the 2006 bonds that purchased Cottonwood Water Works.
Like with the 2004 water revenue bonds that we refinanced, the Water Infrastructure Financing Authority (WIFA) is offering the city the opportunity to refinance our 2006 water bonds of $14.2 million (Cottonwood portion) issued with an average interest rate of 4.91 percent to a rate of approximately 2.25 percent.
Over the life of the loan, our rate payers will save approximately $5.2 million in interest based on projections provided by the City's financial advisor.
The other benefit is approximately $6 million in debt that was assumed by Cottonwood so Clarkdale could purchase their portion of Cottonwood Water Works in 2006 will be refinanced and assumed by Clarkdale through their own loan with WIFA.
So instead of maintaining over $20 million in debt for the acquisition of Cottonwood Water Works, the city will carry less than $13.5 million on its books from the refinancing.
There are costs associated with the refinancing as we use bond advisors and lawyers to help us through the process. However, those costs represent a very small percentage of the loan.
To take advantage of the extremely low interest rates offered by WIFA and to address needed improvements to the city water system, we will be including an additional $2M funding request in our application to install a water line along Highway 260 across from Walmart. This line will create a redundant water supply in some units of Verde Village and encourage economic development on the east side of the highway.
As part of the city's application to WIFA, the agency will consider giving the city a grant in the form of forgivable principal to apply to the Highway 260 Project. If granted, this will significantly reduce the cost of the Project for the city.
So let's review the evidence: With the 2004 water bonds, we reduced the interest rate from an average 4 percent to 2.2 percent, saving the rate payers $1.8M over the life of the loan.
We financed the replacement of the water line along Mingus Avenue and $550,000 of the $1 million cost of the line was forgiven by WIFA.
This financing also freed up a debt payment reserve account of $111,826 that will help the city pay for other capital water projects. With the 2006 water bonds, we will be lowering the interest rate from an average of 4.91 percent to as low as 2.25 percent, saving an estimated $5.2 million in interest during the life of the loan.
We will also decrease our direct debt load by approximately $6 million because Clarkdale will be able to assume their share of the original financing through their own WIFA loan application which is pending.
We will arrange additional funding for a new water line on Highway 260 for $2 million which will be eligible for a grant that could cover a significant portion of the cost.
Wouldn't you take advantage such an opportunity to refinance a loan? The substantial savings will benefit all customers of the water system by reducing debt service on our outstanding debt even with the added cost of the Highway 260 Project.
It just makes good, common sense.
Diane Joens is the mayor of Cottonwood.