Refinancing Land Loans

Refinancing a land loan can benefit you by saving you money or easing your current financial obligations. But what are the drawbacks? I’m here to help you better understand the land loan refinance process and give you some things to consider.

The informal rule-of-thumb is that if you can get at least a 1% interest rate reduction then it’s probably worth your while – but there are fees associated with all refinances to take into consideration. While many landowners may be interested in refinancing due to low interest rates, the decision to refinance or not should be based on your personal financial circumstances not just this week’s rates. While many borrowers focus solely on interest rate it is important to establish your goals to make sure the loan product meets your individual needs.

If you came to me wanting to refinance, my first question to you would be: “What is your goal with refinancing?” Let’s talk about a few of those goals:

• Refinancing to secure a lower interest rate can lead to a lower monthly payment and interest paid over the life of the loan. As mentioned, the general rule of thumb is that refinancing is a good idea if you can reduce your current interest rate by 1% but can vary based on your individual scenario.
• Refinancing to shorten the loan term could be another reason: When interest rates fall, landowners can potentially refinance for a shorter-term maturity without much change to the monthly payment which can lead to significant savings in interest paid over the life of the loan.
• Another goal may be moving from an adjustable rate to a longer-term fixed rate: Adjustable rates typically start off at a lower rate than a long term fixed rate, but over time can adjust and increase to the point at which it may be the same or higher than a long-term fixed rate. When this occurs converting to the long-term fixed rate can eliminate any concerns with future rate hikes. Conversely, converting from a long-term fixed-rate loan to an adjustable rate loan—which can often have a lower monthly payment and interest rate—can be a sound financial strategy if interest rates are falling, especially for landowners who plan to sell the property or plan to pay the loan off early.

No matter what your goals are, an important calculation in the decision to refinance is the break-even point: the point at which the costs of refinancing have been covered by your monthly savings. After that point, your monthly savings are completely yours. For example, if your refinance costs you $2,000 and you are saving $100 per month over your previous loan, it will take 20 months to recoup your costs. If you intend to sell or pay off the loan within two years, a refinance under this scenario may not make sense.

Like many financial transactions, refinancing can be complex and requires due diligence on part of the landowner. The most important thing to remember is that a cheaper interest rate doesn’t automatically mean that it makes long-term sense.

Current interest rates are extremely attractive so it’s actually a good time to consider refinancing, but it’s important to understand the associated fees so that you don’t end up on the wrong side of the transaction. And that’s why I’m here.

You can call any of the lenders here at Texas Farm Credit and we’ll help you crunch the numbers and assist with your refinance should you choose to go that route. We have plenty of experience and would be happy to walk you through it.