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fordtraktor
Jun. 2, 2012, 01:57 PM
Anyone else considering refinancing your farms with the low rates? We just got a quote from our bank of 3% fixed for a 15-year...a 2.25% drop from out current rate. I am having a hard time imagining a downside as our payment will only go up $90/month from our current 30 year loan. Am I missing something? Closing costs about a month's payment. Is that reasonable?

I am not a numbers person...any reason to stick with a 30? Payment would drop about $500/month but since we can easily make the current one I am tempted to go with the 15 and prepay on that. We have prepaid a fair amount already and hope to pay it off in 8-10 years. Any advice from real estate savvy people would be much appreciated!

Mods, I hope this is horsey enough...but our mortgages are a huge part of farm life, balancing horses and money and all the rest of the worries that come along with having horses at home...

IFG
Jun. 2, 2012, 02:41 PM
Not an accountant or anything, but be aware that your tax deduction may change because more of your $$ will be going towards the principal (which is a good thing), than going towards interest.

We have only 22 years left, so the refi costs are not quite so attractive for us.

Guilherme
Jun. 2, 2012, 03:09 PM
Closing costs sound kind of steep. See if there is a Farm Credit/Ag Credit organization in your area. Last time we refinanced the costs were under $600 (IIRC). We've been able to modify the note three times since then @ $150/mod. which has lowered our rate from an ititial of 5.99% to 3.69%.

If you go with a financing co-operative then you'll get a patronage refund each year, making the actual rate somewhat less than the stated rate.

Shop around before you make a final decision.

G.

candyappy
Jun. 2, 2012, 03:31 PM
If you have the cash to pay the closing costs. If your mortgage is only increasing $90.00 a month and it is a fixed rate loan I would do it. The money you are saving in interest on 15 years of payments is well worth it. The downside is that you will pay a lot less interest and for tax purposes that hurts. We bought this place and refinanced at 3.5% for 15 years and we can't itemize on our taxes anymore!! But our payments stayed the same and we cut 15 years off our existing loan and it was well worth it. Find a good lender who deals with farm properties.

Equibrit
Jun. 2, 2012, 07:37 PM
I have always thought it better to get a lower rate for a 30 year and pay off more principal each month than is required.

RainyDayRide
Jun. 2, 2012, 08:29 PM
30 year rates are typically higher than 15 year rates.

If you can easily afford the higher 15 year monthly payments - and it sounds as if you can - go for that one. You'll be paying off the balance that much faster.

The only advantage I can see to getting a 30 year is the flexibility to be able to choose whether to add extra to your monthly payments to pay the mortgage off faster or to just send in the 30 year amount if money is tight for some reason.

Equibrit
Jun. 2, 2012, 10:55 PM
30 year rates are typically higher than 15 year rates.



Yes (about 0.5%these days) - but they may be lower than her current rate, and by paying down principal early you will reduce the overall amount of interest paid, while retaining flexibility. You'd have to run comparable amortizations to make the best decision.

msj
Jun. 3, 2012, 08:14 AM
If you have a financial adviser or a person that does your taxes, talk to them. They can look at your situation and give you the best information.

I chose to refinance from a 30 yr to a 15 yr mortgage 2 yrs after I bought my farm because the rates went down over 2 points. Most months I also paid an additional $200 toward the principle and paid the mortgage off in 11 yrs. I don't know if it was the wisest from a tax stand point but the amount of $ I saved on not paying interest made it worthwhile for me anyway, but then I was brought up with the mindset that "if you couldn't afford to pay cash, you didn't need it". By paying it off early enabled me to take an early retirement at age 58 so I was still young enough to really enjoy the farm. :)

TrotTrotPumpkn
Jun. 3, 2012, 10:49 AM
Personally, if the 30 year is only .5% more than a 15 year, I would also do a 30 year refi and pay it off on the 15 year (or sooner) time frame with extra payments. I think the flexibility is worth the minimal $ difference in .5%. You never know what life holds. One thing to also look at is if your income is very fixed. Mine varies (self employed) so I am better off with the 30 and paying more, but maybe your income is very secure and always the same?

BUT...The only way to know for sure is to run amortization tables to see what the difference really is. Bankrate.com has an amortization calculator where you can run numbers and also show what happens if you add extra payments, etc. Also see what overall interest you pay if you don't do the cost of refi, but continue paying extra on your current mortgage.

When you are figuring your closing costs, are you also adding in the cost of the appraisal? I assume you are ;-) Will it work if your place appraises for a lot less than you paid due to lower comps in your area? (No idea if that applies).

carolprudm
Jun. 3, 2012, 11:15 AM
Personally, if the 30 year is only .5% more than a 15 year, I would also do a 30 year refi and pay it off on the 15 year (or sooner) time frame with extra payments. I think the flexibility is worth the minimal $ difference in .5%. You never know what life holds. One thing to also look at is if your income is very fixed. Mine varies (self employed) so I am better off with the 30 and paying more, but maybe your income is very secure and always the same?

BUT...The only way to know for sure is to run amortization tables to see what the difference really is. Bankrate.com has an amortization calculator where you can run numbers and also show what happens if you add extra payments, etc. Also see what overall interest you pay if you don't do the cost of refi, but continue paying extra on your current mortgage.

When you are figuring your closing costs, are you also adding in the cost of the appraisal? I assume you are ;-) Will it work if your place appraises for a lot less than you paid due to lower comps in your area? (No idea if that applies).

We went from a 30 to a 15 year mortgage but the appraised value was sickening. If we were to sell our farm at the appraised value we would lose well over $250K

Guilherme
Jun. 3, 2012, 11:45 AM
You have to put your mortgage into the context of broader financial planning.

If the interest split between 15 and 30 years is .5% then I'd go for the 30 year and just prepay. Of course be careful and ensure that there are no pre-payment penalties. Prepayment builds equity faster. The lower contract payment gives flexibility in the event of future issues (illness, injury, loss of employment, etc.). The higher equity base gives the opportunity to take a second mortgage, if necessary, to cover major expenses like a new roof, new siding, etc.

The tax impact can be easily overstated. Again, you have to put the tax advantage into the context of your other financial benefits and burdens. Being debt free is probably a better situation than being indebted, even though being debt free will have a negative tax impact.

Right now the macro-economy, to put it kindly, is "in flux." If we swing back into recession, what happens to income? If we don't, what happens to income? Deciding on a debt load has to take into account what you see as your income future. That is a much larger issue than tax impact.

Another issue is how you see future economic growth. If we are in an inflationary cycle, even at very low levels, then debt is a Good Thing because you will pay a present obligation with future dollars that are worth less. But if you see a deflationary cylce on the horizon then eschew debt because a present obligation will be paid with every more expensive dollars.

So spend a bunch of time playing "what if" with a yellow pad or Excel spreadsheet to see what the consequences of certain decisions for you. Seldom is there a "school solution" that will apply to everybody.

G.

fordtraktor
Jun. 4, 2012, 09:05 AM
Thanks very much, I'll look into these things and some things to consider. I thought the closing costs were a bit high too. I would never accept a loan with prepayment penalties (are those even legal any more?) especially as we prepay regularly.

I don't really want to know what it will appraise for, sigh. But it should be enough to cover the amount we borrowed even if less than we paid. Our income is fixed, both on salary and no threat of losing jobs in view. Though of course you never know what life will throw at you.

The 15 or 30 question is a real question to ponder.

I have never really understood the tax issue. Isn't it good to pay less interest no matter what? A deduction is only 1/3ish "discount." as a deduction comes off the total, not like a credit. Preserving the deduction has always seemed to me like buying something you don't need because it was on sale -- still a waste of $$. Since our tax system is incremental "getting in the next tax bracket" is not a real thing, you only pay the higher rate on the additional money you make, not all your income. As I understand it. What am I missing?

(I don't itemize the farm for tax purposes, it's just a hobby farm, FWIW.)

tle
Jun. 4, 2012, 09:15 AM
Do not consider the tax implications! It's not worth it in the long run to pay more in interest (which is what gets you your tax deduction) to save a minor amount in taxes. This advice brought to you from Dave Ramsey. :) Seriously... the numbers don't add up. The tax deduction is a BONUS, not a logical reason.

If you pay $5000 in interest and are in the 25% tax bracket, you're going to get a deduction of $1250. So instead of paying taxes on $50,000 for example which would be $12,500.... you're going to be paying taxes on $48,570 which would be $12,142.50 -- so you gave the bank $5,000 to save from giving the IRS $357.50.

Even if my thinking is wrong you get to deduct the full $5000 from your taxable income... you're still going to pay $11,250 in taxes... saving $1250 in taxes because you spent $5000 in interest. Where does that make sense?


If you can make the 15 year payments, do it. Why have the debt hanging around longer than needed? Think of what you can do in (as you say) 8-10 years when you have NO mortgage payment!!

horsetales
Jun. 4, 2012, 10:00 AM
We just did a 15 yr re-fi. Check around for better deals. Our bank did ours for $100 - they covered all of the costs unless we backed out. If we did, then we had to pay costs for appraisal and other misc fees. My boss also just did a re-fi on her house and her bank did a 0 cost re-fi.

I'm witrh Suze Orman on the own your house outright as soon as you can. The tax savings rarely off-set the interest paid.

TrotTrotPumpkn
Jun. 4, 2012, 12:53 PM
Thanks very much, I'll look into these things and some things to consider. I thought the closing costs were a bit high too. I would never accept a loan with prepayment penalties (are those even legal any more?) especially as we prepay regularly.

I don't really want to know what it will appraise for, sigh. But it should be enough to cover the amount we borrowed even if less than we paid. Our income is fixed, both on salary and no threat of losing jobs in view. Though of course you never know what life will throw at you.

The 15 or 30 question is a real question to ponder.

I have never really understood the tax issue. Isn't it good to pay less interest no matter what? A deduction is only 1/3ish "discount." as a deduction comes off the total, not like a credit. Preserving the deduction has always seemed to me like buying something you don't need because it was on sale -- still a waste of $$. Since our tax system is incremental "getting in the next tax bracket" is not a real thing, you only pay the higher rate on the additional money you make, not all your income. As I understand it. What am I missing?

(I don't itemize the farm for tax purposes, it's just a hobby farm, FWIW.)

I have never had a client, even in the highest tax bracket, who paid off their mortgage early lament the lack of tax deduction. They have all universally loved not having a mortgage and owning their house outright. Just saying....

Phaxxton
Jun. 4, 2012, 04:42 PM
Re: Farm Credit loans... I realize this may not apply to the OP, but perhaps to others reading this.

In my area, Farm Credit only gives 20 year loans on farms and those loans have higher interest rates than traditional lenders on non-farm properties. The amount of patronage refund we got this year didn't offset the interest enough to make it in line with traditional financing on a non-farm policy - not by a long shot. Patronage refunds are also not a guarantee, so I definitely wouldn't count on them every year. If your farm qualifies for a loan from a traditional lender, I would venture to guess you will get a lower interest rate and longer term loan through them.

That said, I am considering refinancing through Farm Credit right now - b/c they are our only option for this type of property. We have to see what the closing costs will be, though, to see if it will be worthwhile...

I'd kill for traditional 30-year financing right now at current rates. Even though we'd pay off the mortgage much sooner, I'd like the option of a lower monthly payment when necessary.

Those of you with farms financed through traditional lenders, how much land do you have? I think we were told that if the house isn't at least 60% of the total value of the property, then traditional lenders wouldn't touch us. (I may not have that exactly correct, but something to that effect.)

Phaxxton
Jun. 4, 2012, 04:53 PM
Closing costs sound kind of steep. See if there is a Farm Credit/Ag Credit organization in your area. Last time we refinanced the costs were under $600 (IIRC). We've been able to modify the note three times since then @ $150/mod. which has lowered our rate from an ititial of 5.99% to 3.69%.

If you go with a financing co-operative then you'll get a patronage refund each year, making the actual rate somewhat less than the stated rate.

Shop around before you make a final decision.

G.
Wow, thanks for posting the approx closing costs. This makes me a little less nervous about calling Farm Credit to ask about refinancing. Or, at least, it gives me some hope that refinancing may be an affordable option.

hey101
Jun. 4, 2012, 08:30 PM
You have to put your mortgage into the context of broader financial planning.

If the interest split between 15 and 30 years is .5% then I'd go for the 30 year and just prepay. Of course be careful and ensure that there are no pre-payment penalties. Prepayment builds equity faster. The lower contract payment gives flexibility in the event of future issues (illness, injury, loss of employment, etc.). The higher equity base gives the opportunity to take a second mortgage, if necessary, to cover major expenses like a new roof, new siding, etc.

The tax impact can be easily overstated. Again, you have to put the tax advantage into the context of your other financial benefits and burdens. Being debt free is probably a better situation than being indebted, even though being debt free will have a negative tax impact.

Right now the macro-economy, to put it kindly, is "in flux." If we swing back into recession, what happens to income? If we don't, what happens to income? Deciding on a debt load has to take into account what you see as your income future. That is a much larger issue than tax impact.

Another issue is how you see future economic growth. If we are in an inflationary cycle, even at very low levels, then debt is a Good Thing because you will pay a present obligation with future dollars that are worth less. But if you see a deflationary cylce on the horizon then eschew debt because a present obligation will be paid with every more expensive dollars.

G.


You have a lot of excellent points.

One other thing people should consider as an alternative to prepayment, is taking that cash and investing it in the stock market. If you are a reasonably savvy investor (aka, if you invested in the Facebook IPO, you should probably stick to your strategy of pre-paying down the mortgage ) and have a very low interest rate on your mortgage, a longer-but-fixed mortgage would then give the flexibility to prepay on mortgage principle if the market/ economy is contracting, or invest in the market if you can get more return on your money on the open market than you are paying in interest rate on a mortgage.

We are thinking about refinancing two properties with two very different end games. One we know we will not be keeping longer than 5 years, so that one is easy. The other one we have no idea how long we will be keeping; we've been wrong every time for the past 5 years!

Good discussion.

ldaziens
Jun. 4, 2012, 08:48 PM
I'm not a financial or tax person, and a good financial planner would be great resource for you in making this decision. But, my advice is to definitely consider finding the best deal on a 30 year and making the payments to pre-pay it off in 15. Having that financial flexibility can be a huge benefit, but if you are already debt free aside from the mortgage and have plenty of money in secure and stable savings and have secure fixed income, then the interest savings on the 15 might be worth it. You just have to run the numbers and think about different worst case scenarios.

Bacchus
Jun. 5, 2012, 09:34 AM
My husband is a financial planner, and we are in the process of going from 30-year to 15-year at ~3%. He's absolutely thrilled. We will save a ton of money. I think the closing costs are around $250, but I'm actually not sure. We were very worried about the appraisal, because we had one done a year ago and it was too low. Our neighbors just had one done, and it was too low. However, we were very lucky, and the appraisal came in well over what we needed.

(We are refinancing on our other home, too, and it didn't appraise quite high enough, but we are just going to pay the extra.)

From what I know and have learned from my husband, go for the 15-year.

fordtraktor
Jun. 5, 2012, 11:51 AM
Those of you with farms financed through traditional lenders, how much land do you have? I think we were told that if the house isn't at least 60% of the total value of the property, then traditional lenders wouldn't touch us. (I may not have that exactly correct, but something to that effect.)

We have right at 20 acres so borderline farmette. Our house is probably worth about half the cost of the farm. Our bank gave us no issues with financing but we are in farm country -- maybe that makes a difference. If banks didn't finance at least some farm/farmettes around here they would keep themselves out of half the market. Ours is a local bank and we got our loan right at two years ago.

Phaxxton
Jun. 5, 2012, 01:54 PM
We have right at 20 acres so borderline farmette. Our house is probably worth about half the cost of the farm. Our bank gave us no issues with financing but we are in farm country -- maybe that makes a difference. If banks didn't finance at least some farm/farmettes around here they would keep themselves out of half the market. Ours is a local bank and we got our loan right at two years ago.

Thank you! I think we might contact a few traditional lenders or a traditional mortgage broker to see if they would touch our property for a re-fi, too. I'm guessing that the closing costs might be a lot higher, though. We shall see!

SidesaddleRider
Jun. 5, 2012, 02:22 PM
Question for those of you who are getting 3% 15-yr refi's....

What bank/lending institution are you getting your loans from?

We have a 15 yr mortgage currently, at 4.25%, through Wells Fargo, and Mr. SSR calculated that reducing that to 3% would save us ~$1k/month -- definitely not chump change! WF is not offering the 3% rate, so we are going to have to look around for other lenders.

Aggie4Bar
Jun. 5, 2012, 03:07 PM
Anyone else considering refinancing your farms with the low rates? We just got a quote from our bank of 3% fixed for a 15-year...a 2.25% drop from out current rate. I am having a hard time imagining a downside as our payment will only go up $90/month from our current 30 year loan. Am I missing something? Closing costs about a month's payment. Is that reasonable?

Odds are you'll recover the cost of closing in interest within a very short period of time. It's simple to buid an Excel spreadsheet to compare the effect of your current rate of interest on your balance vs. a refi'd interest. And with a 2.25% drop, your curves would cross soon, even with closing costs rolled into the balance. PM me an email address if you want a sample file.


Question for those of you who are getting 3% 15-yr refi's....

What bank/lending institution are you getting your loans from?

We have a 15 yr mortgage currently, at 4.25%, through Wells Fargo, and Mr. SSR calculated that reducing that to 3% would save us ~$1k/month -- definitely not chump change! WF is not offering the 3% rate, so we are going to have to look around for other lenders. You might want to recheck that. WF's website has a 15-yr fixed rate of 2.875% listed right now.

Our mortgage is through WF, and I actually just completed a refi application last week. They offered us their 3-step with no closing costs, but the rates weren't near as good as what they'd give me for a standard refi with closing cost. DH wants to pull up stakes in the next couple years though, so it was more economical short-term to accept their program than pay closing.

SidesaddleRider
Jun. 5, 2012, 05:07 PM
You might want to recheck that. WF's website has a 15-yr fixed rate of 2.875% listed right now.

Our mortgage is through WF, and I actually just completed a refi application last week. They offered us their 3-step with no closing costs, but the rates weren't near as good as what they'd give me for a standard refi with closing cost. DH wants to pull up stakes in the next couple years though, so it was more economical short-term to accept their program than pay closing.

Thanks! I will check it out when I am on a computer, not my phone. Is that just for the regular loan, or a jumbo? We need the jumbo. ;)

Aggie4Bar
Jun. 5, 2012, 05:13 PM
Thanks! I will check it out when I am on a computer, not my phone. Is that just for the regular loan, or a jumbo? We need the jumbo. ;)

Sorry, that was for conforming. They're not offering crap for jumbo.

horsetales
Jun. 5, 2012, 05:23 PM
Those of you with farms financed through traditional lenders, how much land do you have? I think we were told that if the house isn't at least 60% of the total value of the property, then traditional lenders wouldn't touch us. (I may not have that exactly correct, but something to that effect.)

We have a traditional lender and 30 acres. Our farm is an LLC, so the farm was appraised as a farm for the re-fi. The process was a little longer because they do have to get a special appraiser for farms and it takes a little longer to "process" or be returned to the bank

Phaxxton
Jun. 5, 2012, 09:13 PM
Our mortgage is through WF, and I actually just completed a refi application last week. They offered us their 3-step with no closing costs, but the rates weren't near as good as what they'd give me for a standard refi with closing cost. DH wants to pull up stakes in the next couple years though, so it was more economical short-term to accept their program than pay closing.

Curious what the difference in the rates was, as I plan on contacting Wells tomorrow. The "no closing costs" mortgages often have higher rates so the banks get their "closing costs" back somehow... but I am guessing it is still likely lower than my current rate.

I hate to even think about going through Wells Fargo, as they completely and totally screwed up the sale of my last home, delaying the closing more than 90 days because of their incompetence and laziness. (They were the buyers' lender and absolutely horrible to deal with.) However, I think it is worth a shot since I believe they had the mortgage on my farm for the sellers we purchased from. They also held my mortgage on my last house (after getting it from Wachovia) for years... so hoping the history with them may help.

Phaxxton
Jun. 5, 2012, 09:14 PM
We have a traditional lender and 30 acres. Our farm is an LLC, so the farm was appraised as a farm for the re-fi. The process was a little longer because they do have to get a special appraiser for farms and it takes a little longer to "process" or be returned to the bank


Thank you. :) Were you able to get a 30-year mortgage?

kcmel
Jun. 5, 2012, 10:30 PM
I have never had a client, even in the highest tax bracket, who paid off their mortgage early lament the lack of tax deduction. They have all universally loved not having a mortgage and owning their house outright. Just saying....

Absolutely! My business accountant said the smartest thing you can do is pay off your mortgage as fast as possible. Made me feel good about myself, because I am terrible with finances, but it seemed to me like a logical thing to do. We paid off our 15 yr mortgage in about 8 years, and without a mortgage hanging over us felt a lot more comfortable about starting a business.

RainyDayRide
Jun. 6, 2012, 12:17 AM
I think that some of the fallacy behind "oh it's great to have a mortgage because of the tax deduction" comes from real estate agents eager to sell you more than you can afford.

Aggie4Bar
Jun. 6, 2012, 10:33 AM
Curious what the difference in the rates was, as I plan on contacting Wells tomorrow. The "no closing costs" mortgages often have higher rates so the banks get their "closing costs" back somehow... but I am guessing it is still likely lower than my current rate.

Our current rate is 4.75%. They offered a 30-yr fixed at 4.00% or a 20-yr fixed at 3.65% with no closing. If we had chosen to refinance through the standard route and pay closing fees, the rates were 30-yr fixed at 3.65% or 15-yr fixed at 2.75%. Our mortgage broker is a friend of mine and explained that as far as she was aware, it's a customer retention gimmick. I did shop around briefly looking for other options, but in the end, I didn't find anything that would beat 15-yr/2.75%. Final closing costs were the same ballpark.

My reaction to the offered rates was more/less :dead:, but for the short-term, it was more economical to accept their 20-yr/3.65% offer with no closing. I'm going to kick myself if we end up staying put. DH and I both want more land and a bigger house, but there is the option to buy the land behind us and build onto the house as opposed to selling and buying elsewhere.


I think that some of the fallacy behind "oh it's great to have a mortgage because of the tax deduction" comes from real estate agents eager to sell you more than you can afford.Most people won't do the math. Sadly, that includes many real estate agents and even some financial consultants. They're not necessarily trying to trick you; they've just taken the same bait.

Bacchus
Jun. 6, 2012, 11:14 AM
We went down to 3% for 15 years (saving a fortune). We have 10 acres, and I don't think the house is worth 60% of what the property appraised for. My guess would be closer to 40%.

We went through a friend who is a mortgage broker (Rector Hayden).

We never plan to move -- our place is heaven to us.

secretariat
Jun. 7, 2012, 11:10 AM
Also depends on Fanny Mae and the resale market; most originators don't hold the loan.

We've got two properties under mortgage - my home is 40 acres, just re-fi'd at 3%/15 yrs. Had to have most of the value in the house, as noted above. It's now FM.

The other is 70 acres with the house only abut 10% of the value of the farm. It's under a commercial loan at 6%, which I'm obviously working on refi'ing - but it won't fit the conventional "house" mortgage category.