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Refinancing farmland loans can be a strategic move for farmers to improve their financial situation by optimizing cash flow and working capital, consolidating debt, lowering payments, or expanding their ag operation.
It might be a good idea to refinance your farmland loan if:
Interest rates drop, since refinancing could reduce your monthly payments and overall interest costs.
Your credit score has improved since you took out the original loan, as you might qualify for better terms and lower interest rates.
Your financial situation changes, such as an increase in income or a decrease in other debts, because you might be able to secure a more favorable loan or increase your loan amount.
You want to adjust your loan terms, which could lower monthly payments or reduce the total interest paid over the life of the loan.
Your farmland increases in value, which can allow you to access the equity to fund expansion, cover operational costs, or invest in new technology and equipment.
You need to solve for tight cash flow. By refinancing to extend the term of your loan, you can lower your payments and improve liquidity.
Loan features improve, such as more flexible repayment options or lower fees with newer loans.
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Before making a refinancing decision, it's important to consider the potential costs associated with that strategic financial move, such as:
Application Fee: Some lenders charge a fee to process your loan application.
Appraisal Fee: An appraisal is often required to determine the current market value of your farmland. This fee can vary depending on the size and complexity of the property.
Origination Fee: This is a fee charged by the lender for processing the new loan. It is usually a percentage of the loan amount.
Title Search and Insurance: A title search ensures there are no liens or legal issues with the property. Title insurance protects the lender and borrower against any future claims on the property.
Legal Fees: You may need to hire an attorney to review the loan documents and ensure everything is in order.
Survey Fee: In some cases, a new survey of the property may be required.
Recording Fees: These are fees for recording the documents evidencing the new loan with the local government.
Prepayment Penalties: Some existing loans have penalties for paying off the loan early. Check your current loan agreement to see if this applies.
Points: Some lenders offer the option to pay points (a percentage of the loan amount) upfront to reduce the interest rate on the loan.
Comparing these costs against the potential savings from a lower interest rate or better loan terms will help you make an informed decision. Consulting with a financial advisor or loan officer can also provide valuable insights tailored to your specific situation.
You do not need to have a specific, set amount of income to qualify for refinancing. The amount of income needed is not as important as how your level of income compares to your financial obligations.
All lenders rely on some type of cash flow ratio that compares income, or how much cash you have available, to your obligations. This ratio is the key factor in determining whether or not you have sufficient income to refinance.
Below, we’ll walk through the process of calculating your income, your obligations, and your likelihood of qualifying for refinancing.
First, let’s define “income.” Income can refer to either gross revenue (how much money you made) or to the net income (gross revenue minus expenses). However, neither of these figures accurately describes how much cash is available for you to make payments.
Use the formula below to help assess the amount of “income” you may have available to make payments with:
Gross Farm Income + Non-Farm Income - Gross Farm Expenses - Living Expenses + Amortization Expense + Depreciation + Interest Expense = “Income” or “Cash Available”
Let’s better understand that formula by breaking it down into four steps:
1. Factor in ALL income sources, including:
Farm income
Income from non-farm sources, such as wage income, investment income, etc.
2. Subtract ALL expenses, including:
Crop and overall operational expenses. (TIP: An easy way to check that you are capturing everything is to use your Schedule F from tax return records.)
Administrative/overhead expenses, such as taxes, utilities, professional services, and other miscellaneous costs.
Living expenses.
At this point, you’ll have a solid understanding of the amount of cash available to make payments.
3. Add back any depreciation and interest expense listed on tax return records, as most lenders will include these figures.
Depreciation: Because funds did not physically leave your operation, depreciation is considered a non-cash expense and can be added back to your cash available or “income.”
Interest Expense: Since a portion of your farm expenses will likely include interest expense paid, you can add this amount back to “Cash Available” as this amount will also be a part of your obligations.
Amortization Expense: Similar to a depreciation but for intangible assets, not physical ones, this can include water rights, livestock breeding rights, etc.
4. Run your calculations from steps 1, 2, and 3 above to see your final income or cash available total. It will look like this:
Gross Farm Income (Step 1)
+ Non-Farm Income (Step 1)
- Gross Farm Expenses (Step 2)
- Living Expenses (Step 2)
+ Depreciation (Step 3)
+ Interest (Step 3)
+ Amortization (Step 3)
= “Income” or “Cash Available”
Compile a list of ALL of your loan payments, including personal obligations such as home mortgages, auto loans, and student loans. Annualize all payments so that you can compare your total annual income to total annual payments.
To determine a final total, take the income total number you calculated earlier and divide it by your total annual obligations calculation determined above.
Loan qualification will require a ratio of anywhere between 1.0 to 1.50. However, the vast majority of loan programs will use 1.25 as a guideline. One way to think about this ratio is that for every dollar in payments, you have $1.25 to pay it with.
The exercise described above can be completed on a historical basis using actual figures, as well as on a projected basis using estimated figures for the upcoming year. Lenders will look at both, given that each is useful in calculations for different reasons.
Historical figures are important because they:
Indicate the actual income your ag operation can generate
Assess whether your projected figures are actually realistic
Projected figures are important because they:
Account for the most recent changes to your ag operation
Offer the lender an indication of what to expect going forward
Account for potential large pricing swing in local ag markets
Help provide stronger support for repayment capacity
Account for historical figures not accurately displaying current capacity
Equipped with not just financial expertise but their own personal ag experience, FBN Finance loan advisors are ready to talk to you regarding any questions you may have related to your farm finances, potential financial solutions, or other financial strategies for your operation. They are deeply knowledgeable about farmland loans, farm equipment loans, operating lines, and other customized financial solutions that may be a fit for your farm.
Complete the brief form below or call 866-619-3080 to speak directly to a member of our FBN Finance team today.
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Financing offered by FBN Finance, LLC and its lending partners. Terms and conditions apply. To qualify, a borrower must be a member of Farmer’s Business Network, Inc. and meet all underwriting requirements. Interest rates and fees will vary depending on your individual situation. Not all applicants will qualify. NMLS ID 1631119.
Written by Norm℠, reviewed and edited by Mikaela Tierney.
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