It is important to understand that construction home loan rates and mortgage rates are being artificially controlled by the FED. The government believes that low interest rates at this time help with recovery, so they are keeping our rates lower than usual. However the recent debt ceiling crisis brought up an important point. It is possible for the FED to loose control, of the prime rate, or be forced to allow it to rise. There are several circumstances which could lead to a rise in interest rates. One would be a surge in the inflation rate. Another might be a devaluation of our dollar, or any profound and sudden instability in government finances. A rise in the prime interest rate would negatively impact the home loan rates, and mortgage rates.
This situation happened before in the 1980s in a very similar circumstance. President Jimmy Carter had a similarly uncooperative congress that refused the budget and caused economic instability. Other factors, including an energy shortage, and rampant inflation led to higher interest rates, as it was determined that the inflation rate required interest rates to increase. The interest rates shot up and stayed up making the 1980’s loan rates increase to over 18 percent. The increase helped those holding certificates of deposit and other interest based investments, but it put a lot of stress on the housing market.
It is important to remember that while interest rates are low now, they could increase suddenly, and with very little warning. This is something to consider when taking a variable interest rate loan, or waiting to start your home building process. Once you decide to build a home, go through the process quickly and lock in your interest rates at a low interest for both your home construction loan, and your mortgage loan. You may also want to discuss the possibility of interest rate increase with your home builder, and ask what would happen if interest rates go up significantly during the period between signing a contract with him, and having your loan approved.
Similarly to predicting the stock market, one can even more easily predict possible trends in interest rates, however it is impossible to be sure what will happen. One can only watch for signs and act with due caution when the possibility of an increase presents itself. If our country had defaulted on its debts, interest rates would have almost certainly have increased dramatically, virtually overnight. The stock market would have plummeted, instead of the current steady drop, which was a relatively minor reaction to a close call. It is possible that interest rates might still be effected by the problem in the coming months, but it is doubtful that the effect will be as dramatic as in the 1980s. If we had defaulted however the reaction would have been even more profound than in the 1980s and we could easily be looking at 20 percent and above interest rates by the end of the year.
Even if nothing dramatic happens, as the economy continues a gradual recovery interest rates are likely to ease their way upward with the gradual inflation rate, and a leveling of unstable elements in the economy. The government will no longer find it necessary to hold down the interest rates to their current insanely low rate, in order to attempt to stimulate the economy. Thus instability can cause a rapid rise. Growth leads to a gradual rise, and severe economic recession will motivate government to lower interest rates to improve the economy. An economic crisis however has many unpredictable elements which could lead to a sharp rise, followed by a very gradual drop which could take years to become affordable. It is important to be aware of the economic and political climate while planning to build a home, in order to move at the right time to take advantage of low construction home loan rates.