Your ag operation is important to you, your family and your future. Not only do you need to ensure everything is working at its most efficient, you want to make sure its working best for you and your financial situation. Here’s what you should know if you are considering refinancing your farmland.
How Does Refinancing a Land Loan Work?
In general, refinancing is the process of replacing an existing loan with a different loan that has new terms. Low interest rate environments or significant financial changes may mean it’s a good time to investigate what land refinancing would mean for the terms of your loan. For residential refinancing, a common idea is that if you can get a half percent lower interest rate and you plan to stay in the home five years or more, it’s worth it to refinance. There isn’t a magic number for ag land refinancing, but in general the larger the loan, the smaller the interest rate change needs to be to make an impact on your financial situation.
Start by contacting your lender to be sure that they have the most up-to-date financial information about you and your operation. A change in your financial situation, such as paying off debt or increasing your credit score, may make you less risky and change the terms you’re eligible for.
The next step is connecting with a loan specialist, particularly a commercial specialist who works with agricultural land. Refinancing ag land is different from refinancing a home, and not all lenders or loan specialists will be able to help you. After your lender determines the farm loan interest rate you’re eligible for, you’ll need to have an appraisal done. Different types of land are valued differently, so you’ll want someone experienced in agricultural appraisal. For example, cropland is more highly valued than pastureland. Then sign the paperwork and begin paying on your new loan!
Pros and Cons of Refinancing a Land Loan
Refinancing is only worthwhile if its beneficial to your financial situation. Depending on how you want to set up the terms of your new loan, there are a few ways refinancing could help you. It could:
- Lower your monthly payments
- Shorten the length of your loan
- Free up capital you can reinvest
Perhaps that extra money could allow you to purchase machinery or manage farm debt.
You may also be going from an adjustable-rate mortgage (ARM) to a fixed interest rate loan, which would give you better long-term stability.
On the downside, there are a variety of fees associated with refinancing. Essentially, you’ll have to pay closing costs again. Add that to your cost-benefit analysis to determine if refinancing is right for you.
Questions to Ask Before Refinancing a Farm Loan
Every situation is unique, and that’s especially true when talking about agricultural land. Ask yourself if this is the best move for you and your farming operation. If it is, ensure that you are comfortable with the loan process and that you have the capacity to pay refinancing fees.
We Can Help
If you are looking for financial advice, connect with a Farm Bureau financial advisor or ask your agent to set up a meeting. Making decisions about the future of your ag operation is a big job, but you don’t have to make those choices alone. Let us help.