There are a lot of specific terms in the world of financing. Knowing the proper definitions for certain words or phrases makes it easier to understand what your options are and how repayment will work for your loan. Check out this brief overview of land loan terms and repayment options so you can make an informed decision about your land loan choices.
Term and Amortization
One of the most common words you’ll hear in the loan process is your term. This refers to the length of your loan contract, or the length of time you have to repay the loan. It’s crucial to note that your term is different than your amortization, which is the period of time your lender uses to calculate your loan payments. If your loan term and amortization are the same amount of time, then you will pay your loan off in full by the time both periods end.
When it comes to land lending, many loans have split amortization. This means the amortization period is greater than the loan’s term. A longer amortization period creates lower regular payments, putting less pressure on your budget and creating greater cash flow throughout the length of your loan. However, when this happens, you still have a lump sum to pay at the end of your term.
Balloon Payment
A balloon payment is the lump sum you pay at the end of your loan’s term if your amortization period is longer than the term. The balloon payment is equal to the remaining balance on your loan at the end of your term. If your amortization and term are the same length, then the balloon payment refers to the final debt payment on your loan.
Fixed Rate, Adjustable Rate, and Variable Rate
Fixed rate, adjustable rate, and variable rate are land loan terms that refer to your repayment options. With a fixed-rate product, your interest rate stays the same throughout the entire loan term. Adjustable-rate mortgages and variable-rate mortgages, on the other hand, divide your term into separate fixed periods. The interest rate stays the same for the first period, then changes and stays fixed at the new rate for the second period.
The difference between them is that variable-rate mortgages keep your payments the same, while payments for adjustable-rate mortgages increase and decrease based on the prime lending rate. If your interest rate goes up with a variable-rate mortgage, then you will pay the same amount, but more of your payment will go toward interest rather than your principal balance. With an adjustable-rate mortgage, your payments themselves increase, but you’re still paying off your principal balance at the same rate.
The world of farm financing doesn’t have to be complicated. When you work with the team at Farm Plus Financial, you benefit from our comprehensive knowledge, friendly service, and years of industry experience. Find the right farm land financing option for your needs when you visit Farm Plus Financial today.
