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Frequent Contributor

Variable rate/ fixed on land loan

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I was given a rate this week of 3.5 for a variable rate and 6.35 on a 20 year fixed. On a half million dollar loan this is just shy of 15,000 dollar difference / year, but yet every one point interest would rise it is 5000/ year. I have the option of doing the variable with a option of a one time lock in with no loan fees. If i knew interest was to remain stable for 2 years i would chance it. My concern is if something would take off and cause a fast rally in interest rates a 3 % rise would hurt long term. Curious as to what others thoughts are on here as to what you feel is the best route to take here.
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Veteran Contributor

Re: Variable rate/ fixed on land loan

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I would lock it in, pretty hard to believe interest will get alot cheaper, but could increase alot quick, Just my opinion.

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Senior Contributor

Re: Variable rate/ fixed on land loan

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Lock in the 20 yr. rate. When it starts bumping up, and you are in the variable, how many "up" bumps will you take before you run in and "lock" in a fixed? And, at the time the vari has been bumping up a couple of times, how much will the fixed rate you could have had at 6.35%  bumped up? Lock in now before they change thier minds. Rates are on an up swing.

Besides, the interest you pay is all tax deductable, therefore if you are in the 30% bracket, that is nearly 1/3 of a discount.

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Veteran Contributor

Re: Variable rate/ fixed on land loan

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4wd-  you sound like my wife and most politicians... if you pay money out of your pocket it is still in someone else's hands... it doesn't matter if it's a 'tax deduction' or not... it's still gone!

 

the only other thing that would make less sense is..... look intrest is now 10 percent so we 'saved' 3.63 ... so let's build a new house...  duh... the money is still gone!

 

That's what's wrong with things today....my question is why the hell are you borrowing that much money to 'own' the ground in the first place... it won't pay for itself...not even at new crop 5.50....and with top yields for 20 (mind you) 20 years in a row....

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Veteran Advisor

Re: Variable rate/ fixed on land loan

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good questions. I would be very hesitant to be borrowing money right now on new purchases. Everything under the sun seems to already have some fluff for inflation built into it...the time to borrow and buy was a couple of years ago...now the whole world has built in ideas of inflation.

 

Not to say that they are not right, but the timing is everything.

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Senior Contributor

Re: Variable rate/ fixed on land loan

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Yeah ne50, you are correct. Why borrow any money. If you don't have it in your pocket, then walk away. I guess if I had followed that philosophy, I'd still be working on a field service crew with a lot of cash in my pocket, rather than owning (well me and the banks own it) my own farming business. The first thing I ever did in the farming business was sign a promissory note. I am still signing them, only a heII of a lot bigger.

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CIL
Visitor

Re: Variable rate/ fixed on land loan

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1st post.

 

Two options:  1.  Split the debt into the part you can pay in the next 3-5 years on short term rates and the rest on fixed

 

OR

 

2.  Take a 5-10 year rate to get through the next economic cycle of rates and save 100 points or so off the fixed rate - and plan to have 1/2 the debt paid off during the length of the rate commitment.

 

If you have 30% cash to put down, it's your choice to make, sacrifice, etc. to make it work.  Just remember to have an exit strategy if need be - assuming this is a purchase.

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Advisor

Re: Variable rate/ fixed on land loan

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   How many acres are you buying?  How much down do you have?  What are the annual payments per acre with each type of loan?  All these numbers come into play, at least in my case they do.  At my age I want to put enough down so that particular piece of ground can stand on it's own, not rob another farm to make it pay.  Some are saying rates will rise after June 1 when QE to stops.  One posters idea of splitting it into 2 loans, 1 variable and 1 fixed is something to consider.  In a recent Alan Guebert column he writes that hard times can be made harder by decisions you made when times were good.

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Frequent Contributor

Re: Variable rate/ fixed on land loan

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Thank you for your straight forward answer without wanting to know all the personal detaols , or assuming you knewthem. I said nothing about buying more land or buying anything at this time. I got asked how many acres i was buying. And also told not to be buying anything right now. I AM NOT BUYING A THING RIGHT NOW. I WILL EVEN PAY THE HIGHER INCOME TAX, my debt is in land not machinery. This debt is from land purchased 10 and 4 years ago. The one 4 years ago is a 5 year balloon. Made last payment on a 160 bought 20 years ago this week. Every purchase when i bought them would not cqsh flow on their own at the time. But it was no whete like trying to make a purchase today cashflow without having the cash in hand.i have even thought of selling it all in todays market and taking the money and run. Even after the capital gain tax. One would still net values high than what land values were last summer. I remember the people who sold land in the 80's for 3 k an acre and took cash. Then the interest rates went up and land went down. They won two jackpots so to speak. I know another who sold a 160 on contract with 1000 down. Got it back 6 years later but rented it to the same operator for 20 years died a year ago and kids resold to him for 5 thousand a acre this time. Bottom line who knows. But in the long run we do find a way to overproduce or kill demand. Or the world finds alternative sources.
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Senior Advisor

Re: Variable rate/ fixed on land loan

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I have had a variable on an 80 for several years. The highest i ever paid was 7% and the lowest rate was 2.5% last year. I don't know what the rate will be for this year but i doubt it is much higher.

 

At the time I took out the loan, I was prepared to pay off the loan should the interest rate get too high. Selling other assets to retire that debt.

 

About 4 years ago I bought another 90 and borrowed at a 30 year fixed rate of 6.85%.  I went for the fixed rates because they would allow my kids to assume the mortgage should I expire before it was paid off. I made the final payment in January of this year. Istill have the variable interest rate on the 90 because it made sense to pay the higher rate loan off first.

 

I paln to pay of the other one either this year or the next. This year if the tax man doesn't hit me to hard and next year if he does. I don't know about buying more at these prices, but money in the bank hardly pays anything. I like Iowa dirt better than money in the bank.  Especially when they don't want to pay anything to use it.

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