What are church bonds?
Here are some of the frequently asked questions about church bonds. Church bond programs are a form of fixed rate financing typically used to finance church expansion.
Church bonds are certificates of indebtedness which are sold by churches to create funds for church construction, purchase, or renovation. The church is acting as the borrower and the bond investors who are often times church members are the lenders. Bonds, in general, are utilized by not only churches but also corporations, municipalities, states, U.S and foreign governments to finance a variety of project needs. They are one class of investments that include stocks and cash equivalents. The North American Securities Administrators Association (NASAA) has ruled that church bonds can be issued under certain securities guidelines. This bond financing can only be issued by churches, parishes, mosques, or synagogues and must be used for projects related to the church building itself.
Who sells the bonds?
The church bonds issued by the church are sold by the church broker dealer who acts as the lender who follows certain guidelines in the transaction. The church is not required to sell the bonds.
Who buys the bonds?
The bonds are bought by church members as well as investors who are buying bonds at public sale.
Why would a person buy church bonds?
The interest rate earned on church bonds for the investor generally runs from 4.5% to 8.5% . Bank savings accounts and Certificates of Deposit pay only a fraction of this amount. A church bond program is a win-win situation for the church and it’s members.
How are the bonds repaid by the church?
The church makes its monthly payments for this type of church financing into a “sinking fund” administered by a trustee who then distributes the money to the individual bond holders who have made the church bond investment. These monthly church finance payments are made much like any other conventional church loans.
Is the individual investor’s money insured or guaranteed?
No, the church property is used as collateral to guarantee the loan just as it would be if conventional church lending were used.
How does a bond program differ from conventional bank financing loans?
A. The interest rate is fixed for the life of the loan that is typically 20 to 25 years. Since most nonprofit organizations spend all of their income, having a fixed monthly payment allows the church to plan its expenditures better. A bank loan payment can go up thereby necessitating an adjustment in the church’s entire expense picture. Church mortgage bonds are truly a form of long term financing.
B. You reduce your risk with a church bond loan. Bank loans typically require refinancing every three or five years and church’s ability to refinance can depend on a number of stipulations involving such things as income, profit, growth, and attendance. There have been many churches that have been faced with a banker who has refused to refinance a loan even when all the payments have been made on time. Many bank loan agreements restrict the amount of money that the church can borrow for future projects. Sometimes the church’s future increases in income must be pledged to paying down the existing note instead of being used for growth
C. Church bonds offer an open ended mortgage as one of its options. This means that the church can borrow additional money in the future for a new project with out refinancing the existing note. The additional money would be loaned at the rate in effect at that time. Take the case of a church that has borrowed money from a bank at 8.0% who later wants to borrow more money for expansion but the rates have gone up to 10%. The borrower would generally be required to refinance the entire amount at 10%. Not so with a church bond.
D. There are no prepayment penalties with church loans made with bonds. Banks will generally charge a prepayment penalty for early payoff. This prepayment penalty is designed to guarantee them a certain profit whether you keep the loan or not.
E. Banks often charge additional loan fees when a construction loan matures and must be converted to a permanent loan. The same applies when a bank note comes up for it’s three or five year renewal. Refinance costs over the years can add up to a large amount. A church bonds program can provide you with a single loan to carry you through construction as well as the permanent phase.