Everyone likes to talk about interest rates, especially when considering borrowing money. If it is for a home mortgage or a refinance of a farming operation, the conversation is usually about the same. When is the best time to lock-in an interest rate? The short answer is: when they are lowest … right?
This starts the discussion as to how do I know when rates are the lowest? This is where it gets complicated, as lending sources are likely working off rate different indexes. Banks may be using prime rate or Libor as a base and a long-term lender may be using U.S Treasuries or ‘cost of funds’ as a base. The best thing for a borrower to do is follow the major indexes, say prime rate and treasury notes, in the Wall Street Journal or online and pay attention to the trends. If these indexes are heading down, or have been staying down for a while, it may to time to act.
These days, home loans can likely get approved in one day online with little problem. However, the financing or re-financing of a farm operation does not happen overnight. There is a considerable of information required. Due to the complexity of farm operations, and the amount of dollars borrowed, the process can sometimes take 60 to 120 days, or more. This is a lot of time for interest rates to move up or down.
Take comfort that 30-year fixed rate mortgages have been below 5% for over 10 years now. So even if a rate doesn’t hit the bottom, it will not be bad either. Does anyone ever hit the bottom on rate? Occasionally, but usually by accident, not because of instinctual knowledge.
An applicant will only have minimal control over when to rate lock once all the due diligence has been done. Usually this is only a few days window at best. Much of this time will be waiting for rates to go down just a little more, when all of a sudden, they head back up and any small advantage is lost. It is not unlike selling commodities: holding out on contracting product to get that last nickel per pound or dollar per ton, and the market will invariably turn, head down, not come back up for that season.
Also, avoid coffee shop talk with fellow farmers about interest rates because everybody claims to get the lowest rates from their lender(s). Trust me, from the lender side of the fence, we know better.
The bottom line is when offered a good interest that fits cash flow needs, act on it and don’t look back. With the current interest rate environment, now is a very good time to consider long term financing. Many of you may not be old enough to remember the early 1980s, when these same long-term rates were between 12% and 18%. Sick of hearing that aren’t you?
If you’re ready to refinance or make your next land purchase and have questions, start the process by contacting a Conterra Ag Capital lending specialist today.
