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Why farmers should talk to their banker about refinancing today
Last week Brian Scott sent his banker a text to see if refinancing at a lower interest rate was an option for his family’s Indiana farm. Raising corn, soybeans, popcorn, and wheat is the fun part, but that’s not the only place money can be found, he says. After some phone calls and signing a few documents, Scott will be on track to save $100,000 in the next four years by refinancing one farmland loan and his home mortgage.
Because he refinanced the land loan with the same bank the farm has been using for years, the process didn’t require much effort, Scott says.
“Most of our farm loans are a 20-year mortgage, but they renew every five years. This one just hit renewal last year, but we got a pretty good drop on the interest rate, so it’s got four more years before it renews again. That’s going to save me about $4,800 a year for the next four years,” Scott says.
While he was looking at the loans, Scott figured it wouldn’t hurt to ask about his home mortgage. It turned out, there was opportunity to refinance.
The Scotts had heard interest rates may continue to drop and wondered if they should wait. Their banker explained things are moving quickly right now. There is opportunity to save now, and the future is unknown. Scott and his wife, Nicole, made the choice to take advantage of what was certain and move forward to refinance.
“In the long run, the house is going to probably save me more money than the loan on the field,” Scott says.
Scott plans to put the money he’s saving toward other farm expenses, maybe prepay some fertilizer at the end of the year or pay for a few acres of tile.
“If you’re paying less interest on your loans, you’ll have less tax deductions. If I just keep the savings as cash, I’m going to lose a third of it to taxes, so I better spend it on something,” he says.
Is refinancing right for your farm
Growing up, talking to the ag banker with his dad helped Tanner Winterhof discover his interest in finance. Today he’s in his 13th year of ag lending and works for VisionBank of Iowa.
Lately, Winterhof has been working with several of his clients to refinance and take advantage of current low interest rates.
In the home mortgage industry where the average loan is $250,000, the rule of thumb says it’s worth the costs of refinancing if you can get a half percent lower interest rate and you plan to stay in the home for five years or more.
While there’s not a widely used rule of thumb in farmland lending, Winterhof says the same idea applies. Generally, the bigger the loan, the smaller the interest rate change needs to be to create significant savings.
“If they’ve got a land loan for $500,000 and they’re going to keep that land for five years or more, it just becomes less of an interest rate. It doesn’t need to be a full half percent lower to see benefit,” he says. “It only needs to be a quarter percent to where it could be worth your time to do it.”
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What are the steps to refinancing
Winterhof points out refinancing usually comes up in one of two ways. A competing bank may approach a farmer to alert them that interest rates have gone down and they may be able to save money by switching their loan and refinancing.
Lenders may also contact their current clients. “At VisionBank is when we get some type of market blip or a little bit of a bulge like this, we review interest rate reductions on a case by case basis.”
Even if your bank doesn’t reach out, it’s worth giving them a call to start the conversation and build the relationship. The process of refinancing is relatively simple.
Step one, a bank will need to determine what type of risk a farmer is. Most banks have risk-based pricing, Winterhof explains. If you’re looking to refinance, make sure the banker has up-to-date financial information.
“It’s not typical for rates to drop this time of year, but it’s really convenient for farmers because they’ve probably already been in to their banker setting up operating notes for 2020. More than likely, we’ve already got that information. The only thing you might sprinkle on top is your 2019 tax return if that has been done,” Winterhof says.
Next, take a look at the type of loans that could benefit from refinancing. Farmers may have a personal home mortgage, equipment loans, farmland loans, and an operating loan.
“Right now I’m not seeing equipment loan rates dive as quickly as real estate rates. I’m not seeing ag real estate rates dive as quickly as home mortgage rates. A house loan right now is the cheapest I’ve seen in my entire career,” Winterhof says.
He adds, “I do remember a time when farmland rates were lower than where they are currently. Not by a lot, but there is still an instance where someone might have a better rate.”
Once a farmer knows what mortgages could benefit from refinancing and what new rates they’re eligible for, the next step is committing to a lender.
After that, an appraisal will probably need to be done for real estate. An appraisal is ordered by the bank and conducted by a third party. Although an appraisal adds expense to the process, it helps establish how much equity is in the asset that is being refinanced.
Finally, sign the papers with the new agreed upon interest rate.