This Ain’t Your Daddy’s Farm Mortgage

The variety of options available today to fund the purchase or re-financing of farmland would make previous generations envious. Today’s low rate environment, combined with a range of available mortgage structures, offers a remarkable array of ways to improve your farm’s cash flow and lower future uncertainty.

There are 3 key factors to consider when reviewing the financing of your farmland. It is far too easy to get distracted by the headlines of today’s low rates or market volatility and lose sight of the core priorities and objectives you have for your family. When commodity prices whipsaw around, input costs keep going up and equipment needs keep expanding, your land should be a source of stability and comfort. By reviewing these 3 features and understanding and carefully considering the tension between them, you can decide on the structure that best meets your current and long-term needs.

FACTOR 1: TIME HORIZON

Borrowers often default to the longest term (or amortization period) their lender is willing to provide. Since the largest part of their required payments will be the paying down of the principal, lengthening the term has the feel-good effect of reducing the required payments – all else held equal. Unfortunately, not all else is held equal in the real world. In virtually all cases, the longer the payment period over which the loan is repaid, the higher the interest rate, and depending on the rate environment this rate difference can materially increase the total costs of the debt over time. Consideration of the nature of the land in question (is it an incremental increase to a large existing acreage, is it your entire land holding, are you looking for a multi-generational holding period or looking to sell when you hit a certain age?) and the financial objectives you have (are you trying to maximize current cash flow, or looking to be debt free by a specific time?) can help clarify the loan period you should be considering.

FACTOR 2: CASH FLOW COVERAGE

If your objective is to get debt-free by a certain time (e.g. an expected retirement date) or if you expect to sell the land at such a point, then extending the loan terms materially past such an expected horizon may increase your interest costs unnecessarily. Especially if the loan is to add incremental acreage to a larger existing farm, or if it is to refinance an existing higher interest loan, evaluate your payment capacity even under a stress scenario, and compare it to payments on different loan structures. By shortening the term, having a balloon payment date, lowering the interest rate, etc., your lifetime savings on interest expense can materially improve your net worth.

FACTOR 3: EQUITY (DOWN PAYMENT)

Not surprisingly, the range of alternative loan structures available to you significantly increases as you increase the amount of your own equity/down payment that is part of the transaction. There are programs available for first time farm buyers with at least 3 years of Schedule F income, and these programs are generally blends of government programs and market rate bank debt. There are also structures available for the long-time farm owner looking to cash-out refinance some existing debt, but these generally require higher levels of equity. Be clear as to the priorities you are trying to accomplish over the long term and be careful to align your leverage (debt vs equity ratio) to those priorities.

All three of these factors interplay with each other to create a rich variety of alternatives. The USDA’s website has some nice comparison tools that are user friendly and fairly comprehensive that we would recommend you explore at https://www.fsa.usda.gov/. A good lender should be able to listen intently to your objectives and help you select the loan structure that best allows you to take advantage of today’s rates and structure alternatives. Please feel free to contact me to discuss your situation or address any questions you may have.

Tim Kempel | SVP, Director of Agribusiness Lending
NMLS #586675 | tkempel@mchenrysavings.com | 815-331-6406