Q: I bought a small farm using money from selling my other farm and taking money from my IRA. Because of the large income tax I was going to have to pay on the withdrawal and today’s historic low interest rates, we decided to get a small mortgage of about $60,000 on a $350,000 purchase.
We got a variable rate loan from the local credit union and returned most of the IRA money to the account.
So, now I’m in a quandary. We want to refinance our loan but have been told that we can’t do a regular loan because Fannie Mae and Freddie Mac won’t back it. I wish I had known that before I used my IRA money. I could have gotten a regular mortgage from the start. Also, the mortgage lender told us that he doesn’t have any investors who will do a farm loan.
Is there anyone who will help out a small farmer? I am 63 years old and don’t want anything more than a 15-year or 10-year loan. I have an 800 credit score, but I only have $37,000 in income per year, which will go up $800 per month in October, when my wife begins collecting Social Security.
I can’t afford the payments if my interest rate goes up, so I’d like to lock in a low interest rate now.
A: It doesn’t sound as though you were given very good financial advice (if you asked for any) when you were thinking about how to apply your resources for this purchase.
Your initial thought was to pay cash for the property. But, paying the income taxes on the IRA money would have likely pushed you up into a much higher tax bracket. That’s a hefty price to pay when interest rates are at about 4.6 percent for a 30-year fixed and under 4 percent for a 15-year loan.
The good news is that the USDA offers home loans under their rural development program. These are loan for rural home buyers (like you) and are set up a little differently. The amount that you want to borrow shouldn’t be that big a deal and the loan will carry a decent interest rate.
You can find out more information at usda.gov. Click on “programs and services” and then “grants and loans.”
If for some reason that does not work for you, you might consider talking to various lenders about your options. You should consult with a local bank, a credit union, and a mortgage broker.
You may find one of these institutions willing to help you out in your situation. Keep in mind that your variable interest rate loan may stay low for some time while you seek out other options.