Should I refinance? This is a common question, and it often signals a change in an operation. Maybe loan payments feel tighter, a balloon payment on an existing loan is coming due, or tough decisions need to be made, like dipping into working capital or selling a load of grain to pay bills. Or maybe equity in your land could be put to work for improvement and growth.
Taking time to understand what has changed informs refinancing decisions. No two operations are the same, and what works for some may not be right for you.
Refinancing is a financial strategy that aligns the structure of your land loan to your current needs and where you want to take your operation. In the right circumstances, it can improve cash flow and risk management, and make your operation more competitive. What it cannot do is fix underlying problems with costs, margins, or profitability.
Key Takeaways
Know your why: Refinancing should address a specific change—tight cash flow, upcoming payments, or growth plans—not just be a default move.
Refinancing isn’t a cure-all: Refinancing can improve flexibility and competitiveness; it won’t solve underlying profitability or cost issues.
Interest rate is only part of the calculation: Adjusting term length, payment timing, and structure often has a bigger impact on cash flow than a small interest rate change.
Reasons to refinance your land loan: Which situation are you in?
Improve cash flow
The structure of your original loan reflected where you were at that time, ensuring you could make payments without too much pain. But over time, operating costs increase, markets shift, and families grow. Sometimes, loan payments run up against other bills or hit when cash is tight.
Refinancing land loans can ease the pressure by spreading debt over a longer period and/or changing payment due dates. This can be a good strategy for those seeking flexibility in managing cash flow.
Things to consider: If the underlying problem is poor profitability, refinancing will not solve an operation’s cash-flow challenges, although it might fit into a broader strategy.
Lower Interest rate
Interest rates drive many refinancing decisions; even a small rate reduction over an extended period can save money on interest payments.
However, in a rising or uncertain rate environment, a lower rate might be less important than a fixed rate. Moving from a variable to a fixed-rate loan provides the certainty and cost control producers needs in times of volatility.
Things to consider: Do not let interest rate alone shape your decision. Interest on loans accounts for a small part of an operation’s overall expenses
Better loan terms for your farm
Your loan payment is determined by the amount you borrow; the interest rate; the length of your loan, or term; and payment frequency. While interest rate matters, loan structure has the biggest impact.
Changing the timing of payments can improve cash flow. Extending the loan term reduces payments, which in turn lowers fixed costs and breakevens.
Aligning loan structure to your needs and goals provides greater flexibility and can position your operation for opportunity. Your lender can help you understand your options.
Things to consider: It is important to weigh the cost of refinancing against the benefits. In addition to upfront costs, extending your loan may increase the total interest you pay over time.
Access equity
Land values historically have increased over time. You may have “lendable equity” that can be used to improve or grow your operation without tying up working capital. Many of our customers are tapping land equity to unlock flexible, five- and 10-year credit lines.
This is an effective strategy that can strengthen operations, providing cash for equipment, land, or operating costs. A plan for managing and paying off this debt is key.
Things to consider: This is not a place to “park” debt. Without an exit plan, you may not see enough of a return to justify borrowing against your land.
Debt consolidation
The capital needs of a farm never end, and over time, a farm can acquire loans for equipment, livestock, day-to-day expenses, maybe even improvements to the homestead.
Multiple loans can complicate financial management and create additional planning challenges. Refinancing can streamline debt. This can make it easier to understand and manage your finances and potentially reduce borrowing costs.
Things to consider: Simply rolling several loans into a single payment does not necessarily reduce pressure or add value. Consolidating is most effective as part of a plan that addresses underlying pressures.
How can you adjust your land loans
Refinancing is the replacement of an existing loan obligation with another loan obligation under different terms.
Re-amortization means changing the number of years to repay your loan.
Repricing is simply changing the interest rate with your existing lender.
Your loan officer can help determine which option fits your goals.
Factors to consider: Why refinance?
Compare rates and term length
If your main goal is lowering annual payments, interest rates can make a difference. Here is an example of the savings you might see with a 1% drop in rate:
| Type | Original Loan | Refinanced Loan |
|---|---|---|
| Loan Amount | $500,000 | $500,000 |
| (Remaining) Term | 10 Years | 10 Years |
| Interest Rate | 8.25% | 7.25% |
| Annual Payments | $75,745 | $72,347 |
Interest rates are illustrative only, and do not reflect available rates.
What this means: Your annual payment decreases by nearly $3,400. That’s not insignificant.
But if your goal is improving cash flow, extending the term length might be a better fit. Here is an example of the same original loan repaid over 15 and 20 years:
| Loan Amount | Term | Interest Rate | Annual Payments |
|---|---|---|---|
| $500,000 | 15 Years | 7.5% | $57,010 |
| $500,000 | 20 Years | 7.75% | $50,388 |
Interest rates are illustrative only, and do not reflect available rates.
What this means: A longer term typically means less of a break on rate. Here, the 20-year term only modestly lowered the original interest rate, 7.75% compared to the initial 8.25%. Even so, the annual payment drops significantly with a 20-year term—$50,388 versus the original payment of $75,745. Extending the term also means higher interest costs over the life of the loan.
When weighing rates and terms, the question is not as simple as, “Which option lowers my payment?” The lower payment needs to improve your operation enough to justify the cost and term change.
Payment structures provide information on payments and terms of your loans, make sure you consider varying factors.
Will the land still cash flow?
One way to evaluate refinancing is to compare annual land costs (loan payments and real estate taxes) to production. This is expressed as cash-rent equivalent (CRE). In its simplest form, CRE helps you determine if the loan payment fits the income potential of the acres.
CRE is the total of your land loan payments (both principal and interest) plus real estate taxes, divided across your total acres.
In the examples above, our loan of $500,000 finances 160 acres. The farm pays annual property taxes of $3,500.
Now let’s look at the cash flow impact of different loan maturities:
| Loan Amount | Term | Interest Rate | Annual Payments | Annual Taxes | Cash Rent Equivalent |
|---|---|---|---|---|---|
| $500,000 | Original Loan | 8.25% | $75,745 | $3,500 | $495/acre |
| $500,000 | 5 yr IFR/20 yr | 7.25% | $48,491 | $3,500 | $325/acre |
| $500,000 | 20 yr FTM | 7.75% | $50,388 | $3,500 | $337/acre |
| $500,000 | 30 yr FTM | 8% | $44,880 | $3,500 | $302/acre |
Interest rates are illustrative only, and do not reflect available rates.
What this means: CRE helps answer the question: What does my land need to earn per acre to carry the loan and taxes? With the original loan, the land needs to produce $492 per acre to cash flow. A 30-year term, with only a slight reduction in rate, drops CRE by $193 to $302 per acre.
Other considerations
Refinancing involves paperwork and costs. Armed with the right questions, you can avoid costly surprises.
It also is important to understand how services and features from one lender to the next impact long-term costs and flexibility. For example, we are customer-owned, and one of the benefits we offer to reduce the cost of borrowing is our cash-back dividends program.
The questions below are meant to serve as a starting point for evaluating your options.
Refinancing costs
Is there an origination fee? How much, and does it vary by loan size?
What costs am I responsible for, for an existing or new farmland loan? Examples include abstracting, appraisal, title opinions, and recording.
Flexibility
As a lender, how do you handle the following loan servicing examples, and what are the costs associated with them?
Access to re-borrow equity
Partial release
Substitution of collateral
Assumption of the loan
Is there a prepayment penalty if I want to pay off or pay down the loan early? If so, how is it calculated?
Long-term fit
If rates go lower, are you willing to reduce my rate?
Do you finance additional loans using the same mortgage that is filed on your existing collateral? If so, what is the cost?
When refinancing may not make sense
Refinancing should support and improve your financial position. It is most effective when it is part of a broader strategy to keep your operation moving forward. If there is an underlying problem with cost control, for example, and underlying problems are not addressed, refinancing a land loan can quickly go sideways.
Refinancing also makes less sense the closer a loan is to payoff. Any savings might be wiped out by refinancing costs. If a lender charges prepayment penalties, this also can impact actual savings.
There are other situations when refinancing does not make sense. Ultimately, the right move is determined by your individual situation, needs, and objectives.
Good refinancing decisions always begin with the same question: What challenges are you trying to solve?
