Farm Loans: How to Get the Best Rate

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If it’s not the first question you’re asking, it’s probably the second: What is the interest rate on this land loan? It’s common for land loans to be 10 to 20 years in term; the interest paid over that time matters. While it shouldn’t be the only factor when buying farmland or refinancing a land loan, it is an important one.

What determines the land loan rate?

Risk: Lenders look at the risk of the borrower (credit score, history, experience, etc.) as well as the risk of the loan (quality of land, improvements, down payment, collateral, etc.)

Aggregate risk: The more business you do or the more you borrow from us, the lower your rate will tend to be. It’s similar to buying a single bag of seed from a dealer versus buying in bulk; the more bags you buy, the cheaper the rate.

Competition: Lenders want to be competitive in the market.

These three factors all go into determining the rate on a land loan. The Farm Credit System is a network of customer-owned cooperatives (participating associations offer land loans through FarmLend). As such, long-term sustainability is important to owner-borrowers, so those who are high-risk are asked to pay a little more and those who are low-risk tend to pay less.

How do I get a better land loan rate?

Lower your risk to get the best rate. Carefully examine the financials of your operation and improve key financial indicators. A strong owner’s equity percentage will work in your favor, as will lowering debt and building up working capital. You can improve your repayment capacity by focusing on what you can control in your operation.

Which ratios should I focus on improving?

There are 16 ratios and all are taken into consideration. However,  Farm Credit associations that offer land loans through FarmLend typically view accrual capacity and cash capacity as very important.

How does the length of the land loan affect the rate?

Loans can range from five to 30 years, with longer-term loans generally carrying a higher interest rate. A 20-year fixed rate is one of the most common loans. The right term for your operation will depend on your specific situation, including your short- and long-term plans. Will you hold this note for 20 years, or do you plan to sell the land in five years? 

Our article on payment structures can help you understand how various term and payment scenarios would impact your cost to own and cash flow.

What is a rate conversion?

Suppose you choose a fixed rate of 6 percent on a 20-year note. Say that a year later, rates drop to 5 percent. Many Farm Credit associations will opt to do a rate conversion from 6 to 5 percent. And with many of the associations, there is no need to re-apply or write a new loan. The fixed rate will put a ceiling on your rate (it will not go up as long as you don’t default), but it doesn’t put a floor on it because of the rate-conversion option.

How long are rates locked?

Farm Credit associations generally lock rates for up to 45 days without a fee. Longer rate locks are possible, typically with a fee or slightly increased rate.

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