When most people consider refinancing a land loan, they are generally looking to replace their current loan with a different loan at a lower interest rate or different terms to save money on interest expenses, consolidate debt, and/or lower their monthly cash outflow. The decision to refinance a land loan is typically measured against the closing costs of the new loan and how long it will take to recoup those costs via a lower interest rate. It’s important to understand, however, that some lenders offer ways to lower the interest rate on an existing land loan without requiring all the expenses associated with a traditional refinance. In this article, we’ll examine how refinancing works and look at a lesser-known option called loan repricing or note modification, which may allow qualified borrowers to reduce their rate while paying lower closing costs.
The Importance Of Understanding How To Refinance A Land Loan
Land buyers sometimes hesitate when borrowing costs are higher than the unusually low rates available in previous years. However, instead of trying to predict exactly where rates will go next, buyers should understand how changing rates may affect their purchasing power and which options could be available if rates fall after they purchase.
Scenario one is that interest rates stabilize and remain near their current level. Scenario two is that interest rates increase. Scenario three is that interest rates decline. Before considering those scenarios, let’s make two assumptions. First, regardless of what happens with rates, you aren’t going to buy more land than you can comfortably afford. Second, you’re considering a property that meets your needs and long-term goals.
In Scenario 1, there is no incentive to wait. Interest rates are today what they will be in the foreseeable future. In Scenario 2, it will actually hurt you to wait, because if rates rise, your monthly payment will increase per dollar borrowed, effectively lowering the purchase price you can afford. Lastly, if Scenario 3 plays out and rates drop, now is still a good time to buy because with some lenders, you will have the ability to refinance a land loan with a note modification, which can save you big.
Repricing vs. Refinancing Land Loans
To understand more about note modification and how that differs from a traditional refinance, I sat down with Brandon Simpson of First South Farm Credit to learn how they handle note modifications. Simpson stated “Most people who’ve had a house loan or residential mortgage loan are familiar with the substantial costs to refinance their loan when rates go down. That’s because, in most cases, when you refinance a residential mortgage loan, you have to get new title work done, a new mortgage, a new appraisal, sometimes new surveys, so you can be talking thousands of dollars in fees.”
A traditional refinance replaces the existing loan with a new one. Depending on the lender and property, that process may require a new application, appraisal, title work, survey, mortgage documents and other closing services. The exact requirements and costs will vary by loan.
The good news is there is another option available that can save you the cost of these fees and enable you to take advantage of much smaller interest rate dips. Simpson said “One of the major benefits of First South and the Farm Credit System is that we not only make the loans, but we also service these loans. None of these loans are sold in the secondary mortgage market. So what that means to you is, as rates go down, instead of refinancing these loans, we do what’s called repricing.”
With repricing, you’re only signing two or three documents and we’re passing those interest savings along to you, the borrower.” Simpson further clarified, ”In most cases, we’re not having to order new appraisals and do all of the work associated with a refinance, so you’re likely to only spend hundreds of dollars in fees versus thousands. We can do that as many times as it makes financial sense for that borrower. For example, if a borrower in today’s market is paying 8.5%, and the rates drop to 7.5% or 7.0%, we can modify the note to the lower interest rate. And… if the rates continue to drop to maybe 6.0% or lower, we can modify the note again.”
Repricing isn’t automatic, and not every lender offers it. Available rates, fees, eligibility requirements and the number of times a loan can be modified will depend on the lender, the loan documents and the borrower’s circumstances.
Land Loan Refinance Conclusions
Not all lenders offer repricing for land loans. In today’s borrowing environment, it’s important that you understand this option and look for lenders like First South Farm Credit who do offer note modifications. Buyers who place their loan with lenders who offer this repricing option can still chase their dream of acquiring that perfect piece of land today. So, no matter what scenario plays out in the next two to three years, the option of note modification can help you hedge your bets on financing land in today’s interest rate environment.
Whatever direction interest rates take over time, a lender that offers note modifications may give qualified borrowers another option for managing their land-loan costs.
