Farmland Loan Basics
Farmland financing can be a tricky field to harvest for new farmers, or seasoned veterans who haven’t utilized credit in their farming operations previously. But as the market fluctuates, more folks are looking for farm loans to secure a new farm purchase, provide funding for a new rental, or access additional funds through an operating loan to purchase inputs, equipment, and cover operating expenses. Here are a few basic terms everyone should know when exploring farmland financing.
Loan-to-Value Ratio
When seeking farmland financing to buy a new farm, most lenders will only finance a specific portion of a farm’s value and require a down payment for the rest of the purchase price. For farm mortgages, it is common that a lender will only finance 75% of the purchase price and require a 25% down payment from the borrower to complete the transaction. Here is an example of this with round figures:
Farm Purchase Price: $500,000
Farm Acres: 50
Price per acre: $10,000
LTV (75%): $375,000
Down payment from Borrower (25%): $125,000
With most agricultural lenders, larger loans require a larger LTV ratio. It is common for farm mortgages over $500,000 to have a 65% LTV ratio.
Neither of these examples take into consideration collateral of additional farmland that can be pledged to decrease the down payment.
Loan Interest
Despite what you might have heard, money isn’t free. When you borrow from a bank, the bank must charge interest (or a fee) to the borrower for access to the bank’s capital. This is one of the ways banks make profit, allowing them to accumulate more capital to create more loans.
Like other farmland loans, you pay back a portion of the amount you borrowed (the principal) plus interest (the bank’s fee for access to their capital) every month. The interest is calculated based on a predetermined plan, called an amortization schedule.
With each farm mortgage payment you make, you are lowering the principal which also decreases the amount of interest you are paying on the farmland loan. But, most mortgages are structured to front load interest in the early years of the loan.
If you were to get the $500,000 loan above at a 6.8% interest rate, the principal and interest would look like:
| Year | Payment | Principal | Interest | Total Interest | Balance |
|---|---|---|---|---|---|
| Year 1 | $3,259.63 | $426.29 | $2,833.33 | $2,833.33 | $499,573.71 |
| Year 5 | $3,259.63 | $598.34 | $2,661.28 | $167,876.78 | $469,039.60 |
| Year 15 | $3,259.63 | $1,178.78 | $2,080.83 | $456,019.20 | $366,026.91 |
| Year 25 | $3,259.63 | $2,322.33 | $937.29 | $644,229.76 | $163,082.36 |
| Year 30 | $3,259.63 | $3,241.26 | $18.37 | $673,465.34 | $0.00 |
Farmland loans can have different interest rate structures depending on the term of the loan.
Fixed rate: The interest rate does not change throughout the life of the loan. If you have a 30 year fixed rate farm mortgage at 6.8%, the interest rate will be 6.8% of the principal amount for 30 years.
Floating or Adjustable rate: The interest rate will change throughout the life of the farmland loan, adjusting the monthly payment amount. Floating rate loans typically have a lower interest rate in the early months or years of the loan but can increase over time due to structure of the mortgage or what indices the rates are tied to, such as U.S. Treasury bills.
Here are some farmland loan types:
- 3 year Adjustable Rate
- 5 year Adjustable Rate
- 10 year Fixed Rate
- 15 year Fixed Rate
- 20 year Fixed Rate
- 25 year Fixed Rate
- 30 year Fixed Rate
Tillable Farm Loans
Tillable offers farm mortgages, refinancing, cash rent loans, and operating loans and an industry-first all-digital application that doesn’t require a visit to the bank to wait in line or fill out pages and pages of paper documents to acquire the funds you need to grow your operation. You can apply on your phone or computer and have a decision as soon as you hit submit.
If you have questions about farm financing or Tillable finance products give us a call!
