Short of it is I'm attempting to aggressively pay off a loan for some vacant land that has cost me a fortune.  My 3-year fixed is up, and they've negotiated the terms up to 4.35% with the increased rate of recent.  If I want a lower rate than a 3/4.35%, I can either do a 5-year fixed and lock in at 4.0%...or take a month-to-month variable and be at 3.25% currently and try to lock up a rate later down the road if things swing upwards.  Obviously, it kind of depends, and I understand that, but which way is the right way to swing it?  I just feel like rates have nowhere to go but up so the 5 year may be the way to go and lock in the 4% for 5, but then again I'm not a finance guru and maybe one of the many millionaires of ARF has some advice.  It's unlikely for me to pay it off in 5 years and maturity current is looking like 2029, but I am ahead...so maybe 2028.5.

Fixed rate.

Why do you still want to keep it at all?

If the asset is making money overall, then choose whichever path maximizes your gain.
If the liability is losing you money, get rid of it.

Unless it's for personal pleasure, in which case I hope you budgeted whatever you're willing to soak into it.


For a 5 year term, though, all other factors being equal, just take the variable.  Interest rates aren't going anywhere.

Technically, it breaks even with a farm lease.  I pay off the principal, the farmer pays off the interest when it comes down to it.  So, it's kind of a wash minus the principal.  The idea was to originally build on it, but plans do change over time and now I'm kind of leaning towards just picking up a starter home and taking the forgivable govt. loans towards the purchase price.  Use that property for a rental down the road when my wife finishes school and actually supplies additional income into the household.  The farm land can continue being leased for the time being until either property values are restored to some degree or I cave and build on it.

ETA: Actually...this year the farmer paid $900 of the principal, too.  How do you like that?  About time this thing reverses...The lender also requires a purchase of stock with initial loan.  That stock nets a dividend that pays the taxes each year...It's not actually a terrible investment when I number crunch and look at it like that...Lol.  Still hate the payment!

ETA:  I'm only a millionaire with respects to the now defunct Zimbabwean currency.

Fixed is the way to go.  I haver NEVER used ARM, that is where people get into trouble.

Then why would you be aggressive in paying it off?  That makes no sense.

Let the farmer soak the interest while you pay off an interest-free loan as sloooooowly as you like.


Right?  

I understand most people prefer fixed rate because of the security in locking the rate and being easier to prepare.  I've read, however, that as much as 89% of the time you're actually better with an ARM.  But that's the internet.

True...but it's still a bill...and I could technically, in the long run, profit from the farmer's contributions rather than just paying interest...But...that's where it all gets tricky...because what is inflation going to do?  What are rates going to do?  Will the farmer always want to lease it?  Either way, I hate debt.  

Thank you for your honesty.  

I'm a fan of ARM if you are disciplined enough to pay a little extra each month, and the more - the better.  I too think the interest rates are not going anywhere any time soon. I have an adjustable rate equity line of credit that has been 3.00% for so many years that I can't remember how long it's been, probably at least 5 years. The other factor is how much money you owe. The more you owe, the more you will save with the lower rate.

Some financial principles to consider.


Present money is worth more than future money.

Always use other peoples money

Choose the lowest possible payment.

Lock it in at 4% and make additional principal payments if you can afford it.

89% better still means that there is an 11% chance you'll get screwed.

Your land is tillable and currently cash-rented, correct?

You might think seriously about selling. I think farm ground is at peak per acre pricing right now, and I suspect land values are overdue for a tumble.

A field nearby sold for $7,700 per acre in 2010 and $13,100 per acre last year. That kind of appreciation can't, and won't, continue.

BTW, we are going to negative interest rates soon.  So, you might want to consider that too.

Considering that NIRP is a real potential, I don't see an ARM being all that risky for a five year term, YMMV.

FIXED.... especially when the FED dipping their dicks in the cookie jar fucking with interest rates, because the economy is oh so thriving..

I am no millionaire, no college degree...but I have done well for myself with these exact principals.

An ARM is in your best interest if you have cash available at all times to pay off the loan if need be. If you do, take the ARM gamble, if not get the lowest fixed rate that you can. Based on your financial you may want to take a longer term loan at a bit higher rate but pay it off quickly. This gives you some wiggle if you run into financial issues such as a job loss etc..

Never take a variable rate. It'll never go down.

MONTHLY rate change on that ARM?

..... fuck, that.

I look at it as the more you owe, the bigger the risk of a ARM. If you have $10k on an ARM and interest goes up, it doesn't cost you much and if push came to shove, most people could get it paid off somehow. If you have $1 million on an ARM and interest goes up .25%, that is serious money. It's basically a high risk/high reward situation. The more money you borrow, the higher the potential risk and reward.  I understand your logic though.


To the OP, say you have $100k with 13 yrs left. Payment at 4% fixed is $824 and at 3.25% arm it would be 787. If you take the $37 you save each month and apply that towards principle so your monthly payment would be the same if you were 4% fixed, you would pay it off 8 months early. Keep in mind, if you go ARM and interest goes up, you can no longer lock in that 4%. Chances are, interest isn't going to sky rocket but nothing is certain these days and a lot can happen in 13 yrs.

Another scenario would be, what if interest jumped and you were paying 5%. You could still afford the payment but it would be $873/ month. $49 more than if you had 4% fixed. If you made an extra $49 payment per month on your 4% fixed each month, you would pay it off 11 months early.

Finally, a 13 yr, $100k loan at 4% will be a total repayment of $128.5k. A 3.25% loan but making the same payment as the 4% would be $121.5k for the life of the loan. $7k is a lot of money saved but it's far from guaranteed money. Maybe you get lucky and run with the arm for a year or two and lock in 3.5% but maybe you get unlucky and don't get it locked in and end up paying 7% or more. Interest is cheap right now. There isn't a lot of room for it to go down. There is a hell of a lot of room for it to go up. Unless you are going to very agressively pay it off soon, no way in hell would I do the arm in your situation. Though I don't know your situation so it's tough to say. The biggest problem with arms in my opinion is when people use them because they can't afford the fixed rate payment. That is a disaster waiting to happen. Using an arm and aggressively repaying isn't necessarily a bad idea but still has risks. My advice is probably worth less than you paid for it.