
Buying Land: How it will impact your financials?
Is your farm in a good financial position to purchase land? Use these key calculations to find out.
3 MinutesLow interest rate environments are a good time to be strategic about paying off debt and refinancing, re-amortizing or repricing a land loan.
Depending on where you’re at in the life of the loan, how much you owe and your credit quality, such steps could help you save money on future payments.Let’s examine some of the common strategies and key factors to consider when locking in a lower interest rate.
Whether your goal is to reduce your monthly payments or pay off your land loan early, there are several strategies you can use to take advantage of lower interest rates.
Re-amortization means changing the number of years to repay your loan.
When considering your refinancing options, compare the new loan terms – including the rate and number of years to repay the loan – to your existing loan terms. Depending on your situation, it may be beneficial to modify the rate and length of the loan term at the same time.
It’s also a good idea to compare loan terms alongside the cash flow expected from your income to help you better manage payments. Consider the following refinancing scenarios.
Let’s take a look using this example of refinancing to a lower interest rate.
As you can see, the number of years to repay a loan has more impact on your cash flow than the rate of your loan. A 10-year loan at 5.50% has a payment of $66,577 versus a 10-year loan at 4.25% has a payment of $62,668, but a 25-year loan at 5.20% reduces the payment to $36,506.
Our article on payment structures can also help you understand how different payment and term scenarios would impact your total cost to own and your cash flow.
Another important consideration includes comparing the annual expenses of the land to the expected annual income of the ground on a per acre basis. The expression of the annual expenses (loan payments and real estate taxes) is called the cash rent equivalent (CRE).
The $500,000 originally financed 160 acres. The property taxes on this farm are $3,500 per year. The calculation for determining CRE is:
The CRE calculations for the original loan and earlier examples are outlined in the table below:
Remember to consider all sources of income when considering your cash flow needs.
In addition to evaluating your refinancing strategies, comparing rates and term length, and calculating CRE, there are several questions you should be prepared to ask when refinancing a farmland loan, such as:
Is your farm in a good financial position to purchase land? Use these key calculations to find out.
3 MinutesBefore you buy or refinance farmland, understand what closing costs and loan fees you can expect. Prepare with our guide to land loan closing costs.
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