Volume 19: Issue 6 September 2017
BOTTOM LINE Sharing ideas, solutions, resources and experiences that help dairy producers succeed.
BY THE NUMBERS
Explore loan-repayment options BRUCE JONES
Page 7
Webinars highlight changing weather and hoof health
Page 8 Gamagrass can reduce costs
Page 11
Calf-care experts to converge
Page 12
Are you prepared for a long-term health-care need?
In times such as these, when low milk prices make cash flow difficult, some dairy producers may be wishing their mortgage payments and other loan payments were lower so it would be easier to make ends Bruce Jones meet. That is a real option. Here’s an example. A producer goes to a lender for a $100,000 mortgage that carries a 5 percent fixed interest rate. The producer has the option of making monthly payments of $659.96 for 20 years or $536.82 for 30 years. Total payments for the 20-year repayment plan will be about $158,400; the 30-year repayment plan results in total payments of almost $193,300. Because the 20-year repayment plan amounts to total payments that are almost $35,000 less than payments for the 30-year plan, the producer chooses the 20-year repayment option. That makes the monthly payments $659.96 or $123.14 more each month than the $536.82 monthly payment for the 30-year loan. The producer’s decision to go w i t h t h e 2 0 -yea r
Table 1: Loan balances and cash reserves for repayment options
repayment makes economic sense in that it results in less total interest costs. But that decision also puts the producer into a more vulnerable position regarding monthly cash flows. Paying $659.96 per month – versus the $536.82 in the 30-year payment plan – makes it more difficult for the producer to maintain a positive cash flow each month. If monthly cash flow is tight in the mid-term to long-term, a producer should probably elect a 30-year repayment plan rather than the 20-year plan. As cash flow allows, the producer can always choose to pay extra funds on the 30-year mortgage to retire the debt ahead of schedule. Another option is to put that extra money into an interest-bearing cash-reserve account that can be tapped into in the future to cover short-term deficits in cash flow. It’s this flexibility in the use of cash that makes lengthening repayment periods on mortgages, and other debts,
an appealing option. Table 1 shows how our producer’s financial situation will be affected depending on whether the producer pays $659.96 per month for 20 years, or pays $536.82 per month for 30 years and deposits $123.14 per month in an account earning interest at 2 percent. In the first case, the producer’s outstanding balance will drop to about $62,200 in 10 years. During the same period, the loan balance will only drop to about $81,000 if the 30-year repayment plan is chosen. That difference of about $19,000 in the two loan balances is the “cost” the producer bears to have a lower monthly mortgage payment. That cost is partially offset by the cash reserve that is built by depositing $123.14 of savings in an account each month earning 2 percent per annum. Ten years out, this cash reserve will have a balance of See NUMBERS, page 2
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