2020 was a historic year as the US economy recorded low-interest rates. However, as the economy has begun getting back on its feet amid a recovery from the Covid-19 pandemic, there has been a rapid increase in interest rates. This has worried many American ranchers, farmers, and land owners as it triggers an increase in input costs. But this is the thing about the economy – it thrives in uncertainty.
This continuous soaring rise in interest rates has got investors looking for proactive ways to manage their finances and avoid sinking into debts and making losses. Farmers are resorting to innovative practices in a quest to protect their financial health in operations and hedge against the rise in inflation. Nonetheless, they can control a handful of factors, and focusing on them empowers them to support thriving operations.
So, what are some of the options that’ll help you save money and offset these rising costs?
Upgrade Your Credit
The one major determinant of land loans is your credit score. A good credit score increases your chances of getting a land loan and, more so, getting reasonable rates. It would be best if you boost your credit score by requesting copies of your credit report from TransUnion, Experian, and Equifax, which are free.
It’s vital to reduce potential risks to your lender, which will gain more leverage in getting better rates. Ensure your credit report has no misinformation and look for ways to increase your FICO mortgage score. This will give you an upper hand in landing good interest rates.
Make a High Down Payment
The period for paying your land loan and the amount you’ll be paying significantly affect the rates you’ll get from your lender. If you can make a larger down payment to reduce the amount, you’ll pay in installments. For instance, if you pay off 20%, you can potentially increase your chances of landing the best rates. This might also help you avoid private mortgage insurance.
A larger down payment will also allow you to repay your loan balance in a shorter period. This will help you avoid the progressive increase in interest rates as you’ll have cleared your loan in time before the rates are overwhelming. High down payments can also convince lenders to give you lower interest rates as they’ll have confidence in your payback capabilities.
Consider Both Adjustable-Rate vs. Fixed-Rate Mortgage
Some farmers can opt for an adjustable-rate mortgage loan when mortgages go up in a declining interest rate market. This is often because the rate is usually lower than a fixed-rate loan. An adjustable-rate mortgage, a.k.a tracker mortgage or variable-rate, is a mortgage loan whose interest rate is periodically adjusted based on an index that reflects the lender’s cost of borrowing on credit markets.
An ARM typically lasts from 3 to 10 years. They can be advantageous for the farmers looking to use the land for a short period. However, they could potentially bring risks if you carry them over for a longer time. It’s essential to consult with your lender for advice on how to protect yourself regarding ARMs.
Other farmers settle for a fixed-rate mortgage loan to protect against rising interest rates. A fixed-rate mortgage, also known as a fixed interest rate loan, is a loan that has a constant interest rate for the entire life of the mortgage loan. This type of rate is determined before loan disbursement and remains unchanged.
A fixed-rate mortgage is long-lived and shields the farmers from potential inflation and increased interest rates. It is best suited for farmers who get reasonable fixed rates. Negotiating good fixed rates is important to avoid paying more in a declining interest rate market.
Do a Balance Sheet Analysis
This fluid economic climate calls for farmers to know their stand financially. It will help to analyze your finances effectively to understand your loan structures, general risk areas, and current payments. Once you know all that, you can begin exploring the different risk mitigation options to support your operational longevity.
Consider a Refinancing
If you have an adjustable-rate mortgage loan, this current rise in interest rates should be the perfect time to consider refinancing your loan into a fixed-rate loan. This will keep your rates lower as there is an increase due to the uncertainty in the interest rate market. It’s crucial to evaluate your debt and current financial position to determine if this move will benefit you.
The current rise in interest rates has made it difficult for farmers to service their agricultural land mortgage loans due to the increased cost of inputs. However, with the right tips and tricks, there is always a way around curbing those high-interest rates by resting on solutions that will benefit you financially.
Contact us today for any agricultural land mortgage inquiries.