Current Land Loan Interest Rates | Great Days Outdoors

Current Land Loan Interest Rates

Purchasing a tract of land, no matter the size, is a major commitment. As a steward of your property, you are making this investment to live out your dream, whether that’s a large acreage homesite, a piece of ground for your business operation, or a piece of recreational land that you can leave to your family someday. Understanding how to finance this purchase is key to making your dream a reality. Land loans are not as common as residential mortgages, but in reality, they are no harder to obtain if you know where to look. Today we’re going to look at the current land loan interest rates and how these rates affect your cost of borrowing. We will also share some options to consider and share some of the information you will need when securing a land loan.

Current Land Loan Rates

Alabama Ag Credit (AAC) provides financing for farm, timber and forestry operations, rural real estate, agribusiness, equipment, livestock, recreational and hunting land. They are headquartered in Montgomery and have nine offices across the state. I recently caught up with them on the Huntin’ Land Podcast and they offered up a recent update on land financing rates for Alabama. As of the time of this writing, AAC has terms up to 30 years with rates between 7.5% to 9% depending on the fixed rate period. Alabama Ag Credit is affiliated with the over 100-year-old nationwide Farm Credit System and is a stockholder-owned cooperative. That means that when someone obtains a loan with Alabama Ag Credit they become a stockholder of the association and a portion of those earnings are returned to them through a patronage program, as determined by their board of directors.

The Patronage Program’s Effect On Land Loan Interest

What does all of this mean? At closing you make a one-time stock purchase and that stock ownership entitles you to share in the co-op profits, lowering your loan’s total interest cost. When your loan is paid off, the cost of the stock is refunded to you. In other words, when you borrow from Alabama Ag Credit, you become a stockholder and part owner in the cooperative, entitling you to a portion of the earnings (patronage) when the association does well financially. The more you borrow, the bigger your share of earnings. Alabama Ag Credit doesn’t sell its loans on the secondary market like a lot of other financial institutions. When you have a 20-year loan with Alabama Ag Credit, that loan stays with them for 20 years.

Types Of Loans For Land

As part of the farm credit system, one of AAC’s missions is to service rural Alabama and provide financing for people who want to buy acreage for a myriad of reasons. While it specializes in financing rural and farmland they can finance a residence as long as it is outside of city limits and meets other Farm Credit System requirements. One of Alabama Ag Credits’ popular financial products is their 20-year fixed-rate loan with a 15% down payment.  For rural homesites, the standard is a 15-year loan with 15% down.

Land Financing rates 2021
When purchasing farmland, interest on land loans may be tax deductible.

How Do Land Loans Work?

How land loans work depends heavily on the institution from which you are borrowing. Some lenders feel that land loans are riskier than residential, and they set up rates and terms accordingly. At AAC, the terms of a land and rural residential loan, such as interest rate and down payment, depend on the applicant’s unique underwriting factors and a number of components, including credit, financials, loan-to-value, the type of property, the length of term, the market conditions and other factors. One of the things that differentiates Alabama Ag Credit is that they have a complete suite of services which makes life easier for the customer and ensures a shorter buying and closing process.  For example, one of those benefits that AAC offers is that it has its own appraisal department,  which results in a shorter turn-around time for the whole transaction and is also economical.


How To Get A Land Loan

You may have been told that getting a land loan is more complicated than residential-type mortgages, but having seen what both types of borrowers have to go through to obtain them, I can tell you that when you work with a Farm Credit bank such as Alabama Ag Credit, the process is no more complicated, and in some ways even less. If you have the following information, you’ll be well on your way:

  1. Up to Date Financial Statement 
  2. Balance Sheets for Entities  where you are a major shareholder 
  3. Income verification like paystubs and recent Complete tax returns
  4. Liquid Asset Account balances

Land Loan Interest Rate FAQs

Land loan borrowers have a lot of questions about the process and I’ve heard many questions over the years that reflect misguided assumptions. Let’s have a look at some of the most common questions I see as they relate to land loan interest rates.

What is a good interest rate for a land loan?

Your interest rate will fall within a range of rates like those given above depending on your individual creditworthiness. “Good” is subjective, but if you find your dream property, and you can afford it at today’s rates, then those rates are good! If you still feel like you shouldn’t buy because of interest rates, let’s take a look at possible scenarios, and the good news, they are all in your favor. 

The first is that you are going to own and enjoy your dream property. Regardless of your interest rate, you are going to be happy you made the purchase if you were patient and found the perfect piece. Second, if rates go up, you are going to be happy you locked in at today’s rates. Talk to folks who bought properties in the 70’s and 80’s and ask them how they feel about today’s land loan interest rates. Third, if rates go down, you don’t even have to have your loan refinanced. You can ask for a rate adjustment and banks like Alabama Ag Credit will work with you to adjust to the new rate without the need for additional closing costs.

Are interest rates higher on land loans?

In my experience, interest rates are a little higher on land loans. That being said, the key thing to ask is if your lending institution offers a patronage program. As mentioned previously, the patronage program lowers your cost of borrowing, typically to the tune of around 1%. When you consider this, land loan interest rates are fairly close to other types of loans on the market.

Is interest on a land loan tax deductible?

Tax law changes, and what was true a year ago may not be true now. That being said, in certain instances, interest on land loans can be tax deductible, such as when you are building a home on land, even during the construction period. Another instance that interest on land loans may be tax deductible is when purchasing farmland. As you might expect, for your specific instance, you may or may not be able to deduct your interest. Always consult with a tax professional to determine this.


Land Loan Pre-Approval Is Paramount

In my experience as a real estate agent who specializes in land, it is all too common for buyers to make offers before they have their financing approved. While this step in the process can be taken care of after the contract is signed, it really should be taken care of before you even start looking. I’ve seen plenty of instances where properties that are highly sought after receive multiple offers from qualified buyers. In instances where the purchase price is fairly close, landowners will almost always choose the offer that has fewer (or none at all) contingencies. You want to make sure that you don’t miss an opportunity because of a process you could have completed in less than a day. So if you’re in the market to buy land, reach out to a land loan professional and get a land loan pre-approval, This will ensure you aren’t sitting in 2nd place when you find your perfect piece of land.

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