Construction Loan Rates
Shopping around for favorable construction loan rates is an important step in the process of building a home. For many people, building a dream house is something they think about and plan for a long time before finally having the financial means to make the dream come true. A family dream home will most likely be the most expensive purchase a couple will ever make. Containing costs doesn't necessarily mean that quality has to be sacrificed, but keeping those costs under control requires planning, discipline, and know-how. There are many decisions that have to be made along the path from architectural drawings and blueprints to that exciting day when the family moves in with all their belongings. Perhaps they've visited the construction site periodically and seen the progression from dirt lot to framing to almost finished rooms. It's fun to watch the roof trusses being set on top of the exterior framework and seeing the progress as cabinetry, countertops, vanities, and carpeting get installed. But exceeding the budget can turn a longtime dream into a financial nightmare. By researching different mortgage products and varying construction loan rates before entering into any building contracts, the potential homeowner can be confident that money is being saved in interest costs from the very beginning of the process. Jesus once questioned those following him, "For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?" (Luke 14:28).
For the most part, building loans are short-term, for perhaps six months to a year, and usually are interest-only loans. This means the borrower pays only the interest on the principal amount being borrowed to build the house. Comparing the construction loan rates offered by different banks and other financial institutions is vital to finding the best financial package. Even a quarter of a percent difference from one interest rate to another can mean substantially more money being spent on interest or being kept in one's own pockets, perhaps to be used for a new sofa or a master bedroom suite. In many cases, the potential homeowner applies for a construction loan which the builder uses as a line of credit. As the cash is needed to pay various subcontractors and other expenses, the builder takes a draw on the loan. For example, let's say that a couple applies for and are approved for a $200,000 loan to build their dream house. The couple and the builder negotiate a draw schedule which allows the builder to take significant amounts of that cash on a periodic basis to pay for the building costs. The couple pays interest only on the amount that has been taken by the builder. Continuing the example, let's say that the builder makes an initial draw of $80,000. The couple pays the interest on only that $80,000. Later the builder takes another draw of $40,000 for a total of $120,000. The couple is now paying the interest on that amount. It's easy to see how important construction loan rates are as they affect the amount of the monthly payments that the couple is making to the lending institution.
Not all scenarios are like the one above. When a builder is developing a community, he often works with a specific lending institution. To build a home in that community, the buyers may not have a choice of construction loan rates. Instead, the lending institution may only offer one rate. Even so, this should not necessarily be a deal-breaker for the couple. The builder wants people to buy his homes so the lending institution's rates should be competitive. Otherwise, potential buyers will go to the development down the road and purchase a home. An advantage to buying a home in this type of situation is that the construction loan often converts to a permanent mortgage. Instead of applying for, providing documentation, and paying the fees for both the construction and then a separate mortgage, couple only needs to make one application. Once the house is built and a certificate of occupancy has been issued, final documents are signed and the mortgage, along with an amortization schedule, takes the place of the previous building loan. The lending institution is often able to offer different types of mortgages with various rates that can be locked in when the contract is initially signed. Some lenders will even offer a float-down feature so that the couple can take advantage of any decreases in the mortgage rate that occur while the house is being built. In these types of scenarios the construction loan rates are in effect only during the building process.
Potential borrowers can take steps before beginning the application process to ensure they are eligible for the most favorable construction loan rates. For example, the couple in the above example should get copies of their credit reports from the three major credit reporting agencies: Equifax, TransUnion, and Experian. Under federal law, everyone is allowed to receive one free copy of his or her credit report from each of these three agencies at least once a year. A small fee is usually required to get one's credit score, but most financial advisors suggest that individuals obtain the score before entering into a major purchase such as a house. The couple will want to take care of any mistakes on the credit reports and to take care of any overdue bills. If the score is lower than it should be to qualify for the most favorable construction loan rates, the couple should do what is needed to raise the score. This may take some time to accomplish, but will save money in the long run. By doing the necessary research and taking the time to lay a good financial foundation, the dream home will be exactly that for years to come a place for a family to make memories that will last a lifetime.
For the most part, building loans are short-term, for perhaps six months to a year, and usually are interest-only loans. This means the borrower pays only the interest on the principal amount being borrowed to build the house. Comparing the construction loan rates offered by different banks and other financial institutions is vital to finding the best financial package. Even a quarter of a percent difference from one interest rate to another can mean substantially more money being spent on interest or being kept in one's own pockets, perhaps to be used for a new sofa or a master bedroom suite. In many cases, the potential homeowner applies for a construction loan which the builder uses as a line of credit. As the cash is needed to pay various subcontractors and other expenses, the builder takes a draw on the loan. For example, let's say that a couple applies for and are approved for a $200,000 loan to build their dream house. The couple and the builder negotiate a draw schedule which allows the builder to take significant amounts of that cash on a periodic basis to pay for the building costs. The couple pays interest only on the amount that has been taken by the builder. Continuing the example, let's say that the builder makes an initial draw of $80,000. The couple pays the interest on only that $80,000. Later the builder takes another draw of $40,000 for a total of $120,000. The couple is now paying the interest on that amount. It's easy to see how important construction loan rates are as they affect the amount of the monthly payments that the couple is making to the lending institution.
Not all scenarios are like the one above. When a builder is developing a community, he often works with a specific lending institution. To build a home in that community, the buyers may not have a choice of construction loan rates. Instead, the lending institution may only offer one rate. Even so, this should not necessarily be a deal-breaker for the couple. The builder wants people to buy his homes so the lending institution's rates should be competitive. Otherwise, potential buyers will go to the development down the road and purchase a home. An advantage to buying a home in this type of situation is that the construction loan often converts to a permanent mortgage. Instead of applying for, providing documentation, and paying the fees for both the construction and then a separate mortgage, couple only needs to make one application. Once the house is built and a certificate of occupancy has been issued, final documents are signed and the mortgage, along with an amortization schedule, takes the place of the previous building loan. The lending institution is often able to offer different types of mortgages with various rates that can be locked in when the contract is initially signed. Some lenders will even offer a float-down feature so that the couple can take advantage of any decreases in the mortgage rate that occur while the house is being built. In these types of scenarios the construction loan rates are in effect only during the building process.
Potential borrowers can take steps before beginning the application process to ensure they are eligible for the most favorable construction loan rates. For example, the couple in the above example should get copies of their credit reports from the three major credit reporting agencies: Equifax, TransUnion, and Experian. Under federal law, everyone is allowed to receive one free copy of his or her credit report from each of these three agencies at least once a year. A small fee is usually required to get one's credit score, but most financial advisors suggest that individuals obtain the score before entering into a major purchase such as a house. The couple will want to take care of any mistakes on the credit reports and to take care of any overdue bills. If the score is lower than it should be to qualify for the most favorable construction loan rates, the couple should do what is needed to raise the score. This may take some time to accomplish, but will save money in the long run. By doing the necessary research and taking the time to lay a good financial foundation, the dream home will be exactly that for years to come a place for a family to make memories that will last a lifetime.
Construction Loan Rates
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Reviewed by Anonymous
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