The Future is Financed?

Raw land purchases are usually a ‘cash is king’ proposition and we were prepared, to an extent, because of savings and “Crunching the Numbers”. However, before parting ways with a large amount of savings, we had other concerns to mull over. One obvious factor was the land was more than twice the size of what we originally planned. Other items on the short list included the economy, the Pandemic still looming with upcoming holiday surges possible, and a contentious election that added to already uncertain times for all of us. 

We began looking into an alternative that would allow us to keep some savings tucked aside in the case of any large fluctuations in the economy, or some other unforeseeable happening (weather, accidents…) that would put us at risk of overdrawing from emergency funds.  

The alternative that worked for us was getting a loan. However, traditional banking institutions generally do not provide funding for land alone purchases, but out of curiosity and due diligence we contacted our home mortgage lender and they confirmed what we already knew: without physical plans in hand and a builder at the ready they won’t take the risk of financing raw land; a lack of collateral such as a house to repossess is too big a risk for big banks.

BUT, in 1916, President Woodrow Wilson signed legislation creating the Federal Land Bank System which allows agricultural and rural property buyers to be eligible for loans not typically offered through traditional lending resources. Through researching local lenders we came across a farm credit bank, a bank we drove by thousands of times when we lived Upstate and never realized until our closing what type of service they provide the rural farming community. Did we tell you that among the many features of the land, it also has an active corn field running along the road frontage? We didn’t know what to make of it at first, but because of this feature, the property qualified for agricultural lending and tax credits with NYS! However, as with many lending situations, there are drawbacks to this type of loan which is not as flexible compared to home loans, specifically if you are looking for an affordable option. Interest rates are higher for land loans and down payments are usually 30% or more plus closing costs. 

After reviewing the pros and cons of taking out a loan vs. moving cash from different investments, we opted to pursue a fixed rate loan. This opened up more layers to consider, such as:

Interest rates – while land loans typically have a higher interest rate than home loans, it’s all relative; all rates are at historic lows, and the fixed rate loan we chose to apply for was still over 4 points lower than our first mortgage interest rate. 

Savings – on average, diverse investments can grow more than twice the fixed interest loan rate. Thus it made more sense to keep money in our accounts which would allow us to continue to save at a higher rate than the interest owed for a fixed rate loan. Looking into your average rate of return is a definite ‘to do’, and something important to consider during major decision making.  

One lesson learned…in an earlier post we mentioned our financial planner. While he knew of our long term plans, we didn’t call him before closing. After recently speaking to him, we learned there were new options offered through their company that would have allowed us to work with a bank for lower interest rates. These options were offered based on the amount of savings we have tucked away. This is a continued reminder to access/use all your resources available, you are not alone and there is always more to learn.