Fixed Rate vs. Variable Rates: Which is Better?
When in the market for an Ag land loan, farmers are confronted with many important questions. One such question is whether to take out a farm land loan with a fixed or variable interest rate. When making this choice, it is key to know the difference between the two and why different types of loans may be better for certain situations than others.
Fixed interest rate loans are loans in which the interest rate will remain constant for the entirety of the loan's term, regardless of market interest rates activity. A variable interest rate loan sees its interest rate change based on what market interest rates do.
Below we have included a few bullets on things to consider when choosing a fixed vs. variable rate loan, based on what a borrower may be looking for in their loan:
Anticipated length of loan
If you anticipate refinancing your loan in the near term, a variable rate may better suit your needs. This could be due to an expected farm transition or if you anticipate financing additional land/resources in the near future. However, if you foresee holding the loan for an extended term the predictable payment structure of fixed loans may be more optimal.
Current spread between fixed and variable rates
Take stock of where rates are sitting when you are ready to close a loan. The magnitude of the spread (i.e. how far apart the variable rate is from the fixed rate) is an important piece of information to be aware of when making your decision.
Understand your personal tolerance for risk. While one benefit of a variable rate loan is that the interest rate may decrease, the inverse may also occur. Understanding how comfortable you are with that dynamic is very important when making your decision.
Desired payment amount
If you have a targeted interest payment amount, analyzing which loan type will provide an interest payment closest to that amount will aid your decision.
Whether fixed or variable rates, FBN® Finance is here to help you get the capital you need to build a stronger financial future. With our variety of rates and terms, we will provide you the customized financing that works best for your operation.The good news is that if you are a farmer in the market for an Ag land loan, and after reading this you still have questions about which loan type is right for you, FBN Finance would love to help.
Our expert team of loan advisors average 15+ years of Ag finance experience and are well equipped to assist you in getting the loan that best fits your needs. So reach out to us today! We’d love to hear from you.
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