6 tips for navigating a farm mortgage or refinancing

Agriculture News Online

The farm economy has improved, and interest rates remain low, which has improved farm values. In many states, farm real estate values are at an all time high, and for most farmers and ranchers, real estate is their biggest balance sheet asset. But a question remains: Should that equity be used to refinance the existing mortgage, or to purchase additional assets?

In recognition of National Homeownership Month, the American Bankers Association offers 5 tips for navigating the process:

Know what you need. Think about it this way: finance like with like. Your real estate is a long-term asset. If you use your farm or ranch to get additional credit, the proceeds from the loan should be used to finance like assets (purchase additional real estate, refinance existing real estate debt, make improvements to the land and buildings, or build a new dwelling). Using equity from your farm to purchase equipment or refinance short-term debt may not be the best solution. Long-term debt shouldn't be used to finance short-term assets such as new equipment because while the lower payments may be easier to budget, in the long run you will end up paying more. In addition, you should not use your farm or ranch to finance unpaid operating expenses, unless you are recovering from a non-recurring event like a drought.

Organize your finances before you go to the bank. You will need to provide information to the bank in order to have them consider your request. At a minimum, you will need:

Pay stubs, if you have a secondary income source (at least three months prior).

Tax returns (at least three years).

Financial statements (one that is less than 60 days old).

A legal description of the property. A copy of the deed would work, or a copy of a survey if you have one.

If you plan to build a new building, some preliminary information about the cost of and possible financial benefits from the project would be helpful.

A proposed repaym ent plan (typically done with your loan officer, but you should think about how you will repay the loan before you apply).

Any additional information that you think will help your banker to positively evaluate your credit request.

Think about the credit history that doesn't show on your credit report. Credit reports are reviews of your repayment history and are used to help determine loan risk and thus the interest rate you'll pay for the loan. It is possible that past ag loans from other lenders may not have been reported to the credit bureaus because ag loans are classified as commercial loans and do not have to be reported to the credit bureaus. Your banker may ask you to give him written permission to contact your other creditors if their credit experience with you is not on a credit bureau report.

Weigh the costs of the loan and the benefits. If your farm hasn't been appraised in the last 6-12 months, you are likely to need an appraisal and possibly title insurance. Additionally, you will have closing costs, which include attorney's fees, title search fees and other charges. Some banks will charge a loan origination fee; this fee is usually called "points" in home mortgage transactions. Also, be aware that any delinquent real estate taxes will have to be paid at the closing. Be sure to ask what the fees will be and take them into account when evaluating your needs.

Weigh all the options. Stop and think that there are many more choices and opportunities for you to consider to customize your mortgage to fit your exact needs. Be open to the options that your banker will want to review with you. Is a fixed-rate loan the best option for you? What are your goals with this mortgage? How long do you need for a repayment term?

Be cautious. Many farmers and ranchers want to pay off real estate loans as quickly as possible; don't pick a repayment program that is too aggressive and could result in your cash flow being squeezed. Banks can also tailor payments to fit your income stream. Ag bankers understand the cyclical pricing of commodities and its effect on your ability to repay. Bankers will work with you to set up payments that work with your income – whether it's annual, quarterly or monthly payments.


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