Copyright (c) 2012 Farm Credit Services of Mid-America
Deciding what rates to choose for your land financing can be tricky. There are so many different options to choose from that trying to navigate through all of them can leave one frustrated with the whole process.
Before you give up though, here are some of the basics on the 5 different types of rates that are used for land financing. Sitting down and talking to a representative from the financing company can also go a long way in helping you understand what rates are best for you.
Fixed Rates for Land Financing
Fixed rates for land financing are for those that are looking for more security in their land financing. These rates can come in 10, 15, 20 or 25 year loans, depending on your situation.
The great thing about fixed rates is that you will have the same rate for as long as you have your loan, the rate will never change. However, if interest rates do fall you can always refinance to get the lower rate, or you can change to a different rate option.
Obtaining Land Financing With Adjustable Rates
A land financing adjustable rate is also for a certain period of time, but it automatically re-prices itself on its anniversary. So, if the current rates are down, your rates will go down. If current rates are up, your rates will go up.
The adjustable rate is usually lower than what is being charge for a fixed rate; which is one of the best perks. You may also be able to change to a different loan product that may have a rate that works better for you.
Land Financing With Variable Rates
The lowest rates that you may be able to find are on variable rates. However, it is also the rate that changes the most. A variable rate is based on market conditions and can change monthly. To protect yourself from a volatile market with high increases in rates, you can put a “cap” on your rate.
This type of financing is offered in 5 to 25 year terms and many companies allow you to change to a fixed rate if you find that the variable rates are not for you.
Convertible Rates in Land Financing
Convertible rates for land financing are similar to adjustable rates, in that they have re-pricing anniversaries. On a re-pricing anniversary it changes from a fixed pricing period that is more than a year to one that becomes a 1-year fixed rate. You can select terms of 1, 3, 5, or 15 with a 25 year maturity rate.
Rate “caps” can be used on a convertible land financing rate as well. These caps protect your financing from seeing no increase of over 6% for the entire life of the loan and 2% a year.
Land Financing with LIBOR Indexed Rates
London Interbank Offered Rate (LIBOR) rates are a global index that is frequently used to price loans. The rate on your land financing is indexed to LIBOR with a pre-established margin.
There are no penalties for paying off your loan early with this rate, and you can have the loan anywhere from 5 to 25 years. This product is another one that most lenders will allow you to convert to a different fixed rate land financing product.
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