Interest Rates 101: Everything Farmers Need to Know About Interest Rates

When purchasing farmland, it’s important to consider not just the cost of the property itself but also the interest rate. It’s not easy to time the market, but you should aim to purchase or refinance when mortgage rates are low.

Locking in a low mortgage interest rate will result in a lower monthly mortgage payment and less interest paid to the mortgage lender. While a 1% difference may sound relatively insignificant now, it can really add up in the long run.

• How Are Agricultural Mortgage Rates Determined?
• What’s the Fed’s Role in Interest Rates?
• How Do Interest Rates Affect Farm Mortgage Payments?
• How Do Loan Terms and Amortization Impact Interest Rates?
• What’s the Difference Between a Fixed and a Variable Loan Rate?
• How Do Your Farm’s Finances Impact Your Interest Rate?
• Farm Financing from FBN Finance

How Are Interest Rates Determined?

There is no single governing body or institution that determines farmland mortgage interest rates. Rather, mortgage rates are impacted by a number of factors related to both the economic market and the individual buyer.

Economic factors that can impact farmland mortgage interest rates include:

• Federal funds rate
• Bond market
• Number and strength of lending institutions serving the market
• State and federal regulations on lending
• Loan type including fixed vs. variable, term and amortization, and prepayment penalties
• Supply and demand for credit
• Global economic trends and conditions

Factors unique to the borrower that can impact mortgage interest rates include:

• Employment history
• Credit score
• Debt-to-income ratio (DTI)
• Key balance sheet metrics
• Key income metrics
• Loan amount
• Loan-to-value ratio
• Down payment amount on the property
• Collateral
• Loan type
• Geographic location

In general, staying up-to-date on the economy and on your personal financial position can help you forecast possible mortgage rate fluctuations. It is best to speak with a loan advisor to understand current market conditions and the unique financial opportunities that are available.

What’s the Fed’s Role in Interest Rates?

The Federal Open Market Committee (FOMC, also known as the Fed) does not directly set mortgage interest rates, but its actions can significantly influence them. It sets the interest rate at which depository institutions, such as banks and credit unions, lend reserve balances to other depository institutions.

With dual mandate objectives to promote price stability and maximum sustainable employment, the Fed targets a moderate level of inflation of around 2% annually. When the economy is slowing down or in a recession, it may lower the Fed Funds Rate to stimulate economic activity.

When the Fed lowers the federal funds rate, it generally leads to lower interest rates across various types of loans, including mortgages. This happens because lower federal funds rates reduce the cost of borrowing for banks, which can then pass on these lower costs to consumers in the form of lower interest rates on loans and mortgages.

How Do Interest Rates Affect Farm Mortgage Payments?

Because the average cost of U.S. farmland can range from $3,000 to $14,000 per acre, many farmers use land loans to finance farmland purchases. When purchasing farmland, it’s important to consider not just the cost of the parcel of land itself but also the interest rate of any financing you might be using to fund your purchase.

Ideally, you should aim to purchase or refinance when mortgage rates are low. Locking in a low mortgage interest rate will result in a lower monthly mortgage payment and less interest to your mortgage lender.

While a 1% difference may sound insignificant, it can add up in the long run. A 1% increase in a mortgage rate of 6% to 7% for every $100,000 results in an additional $801/annually. Over the lifetime of a 30-year loan this adds up.

For example, a borrower with a 30-year fixed loan for $750,000 at 7% interest has an annual payment (principal and interest) of approximately $60,440.

However, at just 1% lower at 6% interest, the annual payment drops to about $54,487. This is an annual savings of $5,943. This adds up to $178,693 in total interest savings over the course of 30 years.

It’s important to compare rates and stay on the lookout for opportunities to refinance if possible. The money saved from a lower interest rate can be redirected toward:

• Investments: Compounding returns from investing the monthly savings can grow wealth over time.
• Farm improvements: Expanding operations, upgrading equipment, or improving infrastructure can boost farm profitability.
• Debt reduction: Applying the savings toward principal payments on other loans reduces overall debt faster.

How Do Loan Terms and Amortization Impact Interest Rates?

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