If you took a land loan and are unhappy with the terms and the rates, you may wonder if you can refinance a land loan with another lender. The short answer here would be yes.
Refinancing your land loan will allow you to reduce the rate and adjust the loan terms to suit your requirements better. In addition to this, you will also want to refinance to assess your equity or achieve another financial goal.
But if you need more clarification and want a detailed answer, continue reading to get proper insights.
4 Reasons to refinance the land loan
If the thought of refinancing has already come to your mind, then the first step is to get clear ideas as to why you wish to change the existing loan and what you are hoping to gain from this change.
Here are certain situations where you might refinance land loans.
1. Reduce your rates
There is a possibility that when you took the loan, the market rates were way too high, so now you wish to take advantage of the lower rates available.
There is a possibility your credit score has improved significantly over the years, and now you can qualify for a lower rate. Another way to get a lower rate is by reducing your loan, as the shorter terms generally offer lower rates.
2. Pay off your loan sooner.
If you have signed up for a longer loan term, you will wish to refinance and get a shorter one to save on the total interest and monthly interest you will be paying over the life of your loan.
Remember that the shorter term here likely means you must make a higher monthly payment.
3. Reduce the monthly payment.
Choosing a longer loan will be a simple solution if you need help making the monthly payment or wish for better cash flow. Your rates will likely be higher, and you will have to pay more interest.
But this may be worth it for greater peace of mind every month. By choosing to refinance your land loan, you will not have to worry about the higher monthly payments you have to make.
4. Access your equity
Equity, in simple words, is the difference between the worth of your land and what you owe on your loan. Refinancing here will allow you to cash out some of the equity you have already built up.
You will build equity on your land when it appreciates while you pay down your loan. If you have put at least 20% down on your land loan, you already have an excellent way to start.
Types of land loan refinancing
Once you know what you hope to achieve by refinancing your land loan, you must explore different options and consider which lender will offer you the solution you seek. Here are the three most common refinancing strategies you can use in combination with each other or even alone as required.
1. Refinancing
A refinance here means replacing your existing loan with a new one. You will get the funds to pay off your old loan entirely and then start the payment to your new lender.
This is a great strategy when you wish to reduce the monthly installments and the interest rate you were paying on your previous loan.
2. Reamortizing
Reamortization is how your interest payments are spread throughout the loan term. In general, you will have to pay more towards interest at the start of the loan and more principal at the end. You opt for a different loan term when you amortize your loan.
3. Repricing
Some lenders offer you the option to change only the rate while keeping your current term.
The process is known as repricing and is an easy way to save money without getting a whole new loan or even changing the lender.
Make sure you take your time to understand each option in detail and see the advantages and disadvantages of all.
A comparison here will be helpful for you to know what will work best for you and ensure you get the correct loan terms and interest rate you need.
When considering the refinancing option, make sure you take your time to compare the new loan terms, including the number of years to repay the interest rate and other aspects of your existing loan term.
Depending on your situation, modifying the speed and loan term length may be beneficial.
It is also a good idea to compare the loan terms and the cash flow expected from your income. It will help you understand and manage payments better.
Comparing rates and term length
You will significantly reduce your annual payment when you refinance land loans for a lower interest rate. Consider an example where you took an original loan amount of $500,000.
The remaining terms are ten years, and the interest rate is 4.5%. This means the annual payment will come around $63,384.
If you refinance the same loan and get an interest rate of 4%, your annual income will come around $61,816. This means you will save $1568 on interest.
But if you wish to improve the cash for demand with even lower payments, you can stretch the loan term to 15, 20, or 25 years.
But keep in mind that the longer you extend the number of years to repay, the higher the rate you will pay for your loan.
Simply put, this would mean that the number of years to repay the loan significantly impacts the cash flow more than the loan rate.
Cash rent equivalent
Another essential factor you need to consider when choosing to refinance a land loan is including the annual expenses of the land to the expected ground yearly income on a per acre basis.
Herein, the annual expenses expression is called the cash equivalent. Using the example above, let’s consider how the cash flow impact will be seen on different loan maturities.
The $500,000 was initially financed for 160 acres. This means the property taxes on the farm will come around $3500 per year. The calculation for determining the cash rent equivalent will be principal plus interest plus taxes, then divided by the number of tillable acres.
CRE on the original loan amount of $500,000 for ten years with an interest rate of 4% will be $61816 plus $3500, which will be the taxes, and the total amount is now divided by 160 (number of acres). This will bring us to a sum of $48 per acre.
Make sure you take your time to do the calculations before deciding. It will help you make the right decision and ensure you can benefit from the refinancing option.
Other considerations
In addition to the factors mentioned above, there are certain other things you need to keep in mind as well. This will include the following.
1. Fees
You must add any fees associated with the process, like the loan origination fees. Ensure the total cost does not outweigh the potential savings you will gain through a lower rate.
2. Other costs
You need to find out if you need to order a new appraisal of the land, get title insurance, get title registration, or anything else you will have to pay out of your pocket.
3. Prepayment penalty
Make sure to see if you can pay off your land loan sooner than planned in case your income increases or if you get any other source of funds. Also, do not hesitate to inquire about the prepayment penalty you must pay in such situations.
4. Conversions
You need to see if the lender will allow you to use the equity in your new land loan to provide a construction loan or any other form of financing you require.
Finally, once you are ready and know if you can refinance land loans, you need to find a lender prepared to provide you with the required financing at an interest rate and terms that work well for your research. It will help you take the proper steps and avail yourself of the best benefits of refinancing.
Conclusion
Refinancing, no doubt, comes with a lot of advantages. But if you have difficulty finding the right lender, consider trusting private capital investors. They have the expertise and knowledge of the industry.
They can help you choose the best lender to offer you great deals. No matter your requirements, the experts will be there to guide you in the right direction and bring forward the top deals to ensure your refinancing needs are well fulfilled.
