There’s more to refinancing than just interest rate reductions. Sometimes you can actually spend more money in the long run by refinancing – even if the interest rate is lower. There are also times when surviving ‘short term’ is more important than paying more ‘long term’. Below are a few instances where refinancing might be a smart idea:
These are two common occurrences that cause people to start ‘rate-shopping’. It’s been said that if you save a full 1% on your rate then you should refinance, but that’s not always true. For instance, if the cost to refinance exceeds the interest savings over the life of the new loan, then it may not be a good deal.
Ask your lender to prepare an amortization schedule that shows your loan situation and a proposed schedule based on refinancing. Look at both payment amounts and the total interest you’ll pay over the life of each. Think about how the refinancing will affect you both short- and long-term to determine the best option for you.
Regardless of interest rates and refinancing costs, if your current payment makes it hard to pay expenses, then refinancing might help. Keep in mind that if lower payments are needed, a term that exceeds your current loan may be necessary. Make sure you’re willing to see that term increase, keeping in mind that the remaining life of your poultry houses will need to exceed the new term.
In instances where your poultry income has decreased due to these changes, refinancing may be a solution to help your cash flow. However, if changes from the integrator are temporary, you may have some options besides refinancing (for example: out time is extended for a year due to a problem the integrator is having). If you’re concerned about being past due on payments, your lender may be able to extend your payments and change your due date(s) by a few months. Compare the cost of a payment extension versus the cost to refinance. If this is a permanent change in income, refinancing may be needed to reduce your poultry debt payments and improve cash flow.
Sometimes major upgrades are required and a new loan for these expenses would make the farm’s cash flow tight or negative. One way to make the upgrades more affordable is to have your lender refinance your current debt and combine the new upgrades into one loan. While not the most ‘glamorous’ reason to refinance, it could be a factor when determining whether integrator-required updates can be completed. If refinancing your current debt is going to be expensive – and you can afford a new payment on a new loan for the upgrades – consider a new loan or an additional loan. It may save you money in the long run.
This doesn’t happen often, but is wonderful when it does! When rate differences are significant enough that refinancing existing poultry debt results in a lesser term with similar payment amount – seriously consider it. If you can afford the projected payment on the new loan, you will save money in interest AND pay off your debt faster. If your interest expenses are going to decrease significantly, it might be a good idea to give your accountant a heads up before the tax year has ended.
Sometimes you may need to combine all poultry related debt and refinance. It can be difficult to get credit card debt refinanced into farm debt, but if the credit card was used for farm-related expenses, gather statements or receipts that prove it. In addition, smaller loans that have been made for repairs, maintenance, or operating costs can possibly be refinanced, providing a longer term to help cash flow.
A do-over only works if you’re dedicated to make necessary changes in the future. Whether cutting back on personal expenses, re-evaluating hired labor costs, or making some other expense-saving decision, plan accordingly as you begin the refinancing process. If a reduction in poultry income is the problem, use the refinance to help plan expenses and payments based on the lower income. Make a conscious effort to save as much as possible if that income increases either temporarily or permanently.
Lenders will complete projected cash flows that include supplies, repairs, maintenance, and other expenses. First, make sure you agree with the projections and then consider using them to help you create a budget. Think about cutting back on what you can and making an emergency fund for when you have unexpected repairs or a bad flock of birds. In the poultry business with limited lenders, eventually a farmer runs out of options for refinancing if they have to combine debt every few years.
Every operation and farm family is different, so determine what’s best for your situation when it comes to refinancing debt. Always know how a refinance will affect you both today and in the future. Contact your accountant if your annual interest expense will be greatly reduced. Keep a record of any closing costs/fees for tax purposes. Seek a lender that understands the poultry business and knows how to set up your loan term and payments based on that knowledge. Refinancing might be the right choice if it meets both short/long term goals, saves money, increases cash flow and/or is needed to keep the poultry farm in operation.