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 there are ways to refinance a land loan that do not require the costs associated with a refinance. In this article, we’ll examine why it’s important to consider your refinancing options now and learn about a little known option you have when you want to refinance a land loan and pay much lower closing costs.
The Importance Of Understanding How To Refinance A Land Loan
A lot of land buyers are sitting on the sidelines right now because of where interest rates are today as compared with only a couple of years ago. Many buyers aren’t taking into account their refinancing options with no end to rate hikes in sight. While I can’t blame people for this mindset, let’s play out some scenarios if you’d really like to buy land now.
Scenario one is that interest rates stabilize and remain where they are. Scenario two is that interest rates continue to rise. In scenario three interest rates fall. Before we run out these scenarios, let’s make a couple of assumptions. One, that regardless of the scenario, you are not going to buy more land than you can afford. Two, you are buying a piece of land that checks all of the boxes of what you want. If the previous two assumptions are true, right now is still a good time to purchase no matter which scenario plays out, and here’s why.
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.”
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.”
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.
