Variable vs. Fixed Rate: Understanding Land Loan Interest Rates 

From variable to fixed, alternative to conventional, and everything in between—find out which land loan fits you best.  

During times of economic volatility, it’s important to manage your finances proactively. Part of that means ensuring you fully understand the pros and cons of a variable vs. fixed rate on your farm debt.

After years of record-low rates ended in 2022, farmers and lenders alike are waiting for the dust to settle into the ‘new normal’ for farm loan interest rates (trust us, we’re tired of that phrase, too). In fact, many farmers have delayed their growth because of this uncertainty—in turn, delaying their ability to increase profitability. 

 In this economy, the only thing certain is uncertainty. But we’re here to tell you that there are other ways to navigate market volatility besides standing still. And it starts with understanding the full range of financing options available to you.  

Variable vs. Fixed Rate Land Loans 

Throughout history, the U.S. economy has gone through cycles of both high and low interest rates. Whether a fixed or variable rate land loan is preferred depends on two things—where we’re at in the rate cycle and what your goals are.  

Variable Rate Land Loans 

As you may have guessed, a variable rate land loan (VRM) means your interest rate will change over time and involves the following: 

• Initial Period: When you first take out the land loan, you start with an interest rate that is usually lower than fixed-rate land loans. This can make your initial payments more affordable. 

• Variable Rate: Unlike fixed-rate land loans, the interest rate on a variable rate loan can change periodically. This means your monthly payments can go up or down depending on the current market interest rates. 

• Adjustments: The interest rate is typically adjusted at regular intervals (monthly, quarterly, etc.) based on a specific index or benchmark, such as the prime rate or LIBOR. 

• Payment Changes: Because the interest rate can vary, your monthly payments may change after each adjustment period. If rates go up, your payments could increase. If rates go down, your payments could decrease. 

 Variable rate land loans offer the potential for lower initial payments and the flexibility to benefit from lower interest rates if they fall. However, it also comes with the risk that your payments could increase if interest rates rise. 

Why Choose a Variable Rate Land Loan? 

A variable rate farm loan might be a good choice for you if you… 

• Expect rates to stay stable or decrease. 
• Plan to sell your land or refinance your land loan before a significant rate hike. 
• Have more tolerance for risk in terms of your total debt obligation.  

Fixed Rate Land Loans 

Fixed rate land loans mean your interest rate will remain the same for the entire term of your land loan. Benefits of fixed rate land loans include:   

• Up to 30-Year Term: These are a long-term conventional loan, that include terms lengths from 10 years up to 30 years.  

• Consistent Payments: From the moment you take out the loan until it is fully paid off, your interest rate and monthly payments stay the same. This means you’ll have predictable payments every month, which makes budgeting easier. 

• No Surprises: Because the interest rate is fixed, you are protected from any increases in market interest rates. Your payments will not go up, no matter what happens to the economy. 

• Stability: Fixed rate loans provide stability and peace of mind, knowing that your monthly payment will never change. 

A fixed rate land loan offers the security of knowing exactly what your payments will be for the entire life of the loan. This makes it a good option if you prefer stability and predictability, or if you expect interest rates to rise in the future. 

Why Choose a Fixed Rate Land Loan?  

A fixed rate farm loan might be a good choice for you if you… 

• Prefer predictability and stability. 
• Can easily manage debt payments at a higher fixed rate. 
• Believe interest rates are on the rise. 
• Plan to own the land long-term and don’t want to refinance. 

Adjustable-Rate Mortgage (ARM) Land Loans 

When using land as collateral for your farm loan, most people think of it in terms of variable vs. fixed rates, but there’s another option. A long-term conventional land loan with a short-term adjustable rate (ARM) combines features of both fixed and variable rates. Here’s how it works: 

•  Fixed Period (3-5 years): For the first three to five years of the loan (this will depend on your specific loan terms), your interest rate will stay the same. This means your monthly payments are predictable and stable during this time, which can be helpful for budgeting.  

• Adjustable Period (remaining years): After the fixed period ends, the interest rate will reset based on market rates. This means your monthly payments could go up or down each year after the initial fixed period, depending on market dynamics. 

• Up to 30-Year Term: Because this is a long-term conventional loan, the interest rate will adjust after the initial fixed period, but the total length of the loan won’t change unless you refinance. 

• More Protection: Although similar to variable rate loans, ARM loans more often include caps that limit how much the interest rate can increase or decrease at each adjustment period and over the life of the loan. Both ARMs and VRMs can have caps, but ARM loans typically have more structured and common caps due to the initial fixed-rate period and the periodic adjustments that follow. 

With an ARM farm loan, you get the stability of a fixed-rate mortgage for the first few years, followed by potential changes in your interest rate each year for the rest of the loan term.  

Why Choose an ARM Land Loan?  

An ARM farm loan might be a good choice for you if you… 

• Plan to refinance or sell the property before the fixed rate ends. 
• Expect interest rates to remain stable or decrease.  
• Are facing a looming rate reset or balloon payment and want to lock in a short-term competitive rate, but with a 30-year term. 

Don’t Wait for the Fed to Decide Your Farm’s Future 

In uncertain times, it’s important to work with a lender you trust—who has a deep understanding of agriculture and keeps your best interests in mind. Through a range of conventional to alternative financing options, AgAmerica offers farmers and ranchers stability in a volatile market. Explore our spectrum of variable and fixed rate options today, and let us help you set your operation up for lasting success.