Understanding the Legal Framework of Land Equity Loans


Despite the turbulent economy of 2020, US farmland stood strong, maintaining its appeal as a secure investment. This stability continues to attract both new and seasoned entrepreneurs, who view farmland ownership as a reliable pillar for their future.

Farmland ownership brings numerous benefits, particularly in terms of long-term wealth creation. Beyond being a valuable asset that appreciates over time, farmland holds significant potential. It can serve as a source of revenue through land improvements, enhanced crop quality, and improved soil management practices.

For many farmers, the initial cost of purchasing land can be a significant barrier. This is where land equity loans come into play. These loans allow you to utilize the equity you’ve built in your existing farmland, similar to home equity loans. The key difference is that instead of your house, you use the value of your land as collateral. This can be a game-changer for farmers looking to expand their operations.


This blog will share how a land equity loan can benefit you and provide insights into its legal framework.


What are land equity loans?


Land equity loans, also known as land line of credit, raw land equity loan, or land cash-out equity loan, allow you to borrow money based on the value of your farm land. Whether you own a developed farm or an undeveloped plot, you might be eligible for this type of loan.

Land equity is the difference between the market value of your land and any outstanding mortgage or loan balance. In simpler terms, it’s the portion of the land that you truly own outright, free from any financial obligations.

When you take out a land equity loan, your land becomes collateral for the loan. If you can’t repay the loan, the lender can seize your property to recoup their losses.

Generally, lenders are more likely to approve land equity loans for properties with more significant acreage.  The value of your land can also be influenced by its potential uses, such as timber production, agriculture, oil and gas reserves, recreational activities (hunting), or the presence of valuable minerals.


How does a land equity loan work?


A lender typically arranges for a state-certified local or in-house general appraiser to evaluate your property.

This appraisal is a more detailed report than standard appraisal documents. It determines your property’s “highest and best use,” meaning the appraiser will identify how the land could be most profitably utilized.

Does your land have income streams from agricultural leases, timber harvests, or recreational activities, for example? This income or income potential can make it more valuable in the eyes of lenders, so it may be easier to secure a land equity loan.


How much can you borrow?


Lenders typically lend between 50% and 75% of your land’s appraised value. Note that this is a general range — ultimately, the lender will determine the loanable amount based on their risk assessment.

Some minimum loan amounts are also to consider, varying depending on the lender and the loan type. Generally, if you’re refinancing an existing loan with a cash-out option, the minimum is around $25,000. If you’re seeking a land equity loan for primary funding (such as purchasing new land), the minimum cash-out amount is around $100,000, with land credit lines starting at $250,000. Some lenders may offer lower minimums, but these might not be actual equity loans and may have different terms or restrictions.

If you’re looking for a more significant loan amount, you will benefit from consulting with lenders specializing in financing agricultural land. They will be much more familiar with the factors influencing land value and can help you secure the financing you need.


Types of land equity loans


There are three forms of land equity loans, all of which share a crucial requirement: lenders will always require your land to act as collateral. If you can’t repay the loan, the lender can seize it to recoup their losses.

It’s also important to note that if you still have an outstanding loan on the land you used to purchase it, you might not be eligible for a second line of credit. Sometimes, lenders may require you to use the proceeds from a new land equity loan to pay off the existing debt first. This would make the new land equity loan the only outstanding loan for that particular property.


Below are the three types of land equity loans:


  1. Land equity cash-out refinance

This land equity loan often comes with 15-30-year terms, fixed or adjustable rates, and interest rates 1.5% to 2.0% higher than a traditional home mortgage.


  1. Land equity line of credit

The terms of this loan may differ from one lender to another but often involve a three to five-year period and interest rates that are 1.5% to 2.5% higher than conventional residential mortgages. In addition, a lender may provide one-year or one-month adjustable or variable rates. The interest is due annually, quarterly, or monthly, with an annual principal.


  1. Land equity construction loan

Land and construction loans can help you build a home on the farm. The new house becomes part of the loan’s collateral, and you must complete the construction within a strict time frame. The land must also have utilities like electricity, sewage, and water. You can borrow around 70% to 80% of the final property value.

These loans typically last 6 to 12 months, and depending on the terms, paying only the interest during construction is possible. Once construction is finished, you can convert the loan into a regular mortgage.


Do you need a land equity loan?

Whether you are building a house, financing a major project, or looking to reduce debt, we are here to help you find the right land equity loan.

At Private Capital Investors, we offer the best suitable lending solutions for meeting your financial goals. We have specialized financing options like land loans to make it easier to acquire undeveloped land for any development project or personal use.

Additionally, we can help you secure other land loans to support other endeavours, including constructing or purchasing vacant land. We can also find land equity loans to help you purchase or expand rural land.

Our goal is to help you find credible lenders who understand your needs and can customize their loan products to match your requirements. We work with a vast network of land equity loan lenders to simplify your search.

You can count on our team to provide professional guidance to help you maximize an existing or prospective property’s equity with appropriate financing. Contact us today to learn more about our land equity loans in Texas, Phoenix, Florida, Massachusetts, and Denver.

Want to learn more? Get in touch with us today.

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