Mortgage and home construction loan rates are at an all time low, and have been for quite a while. The FED assures us that they have no plans to go up considerably, at least until mid 2013. The FED is keeping interest rates artificially low at this time, to encourage economic recovery. While it is possible that rates could increase a little during that time, overall the next two years look great for home building if your own finances are reasonably stable. It seems that 2011 – 2012 is the perfect time to get a loan to buy or build a home.
Lock in a Fixed Rate Mortgage, But Consider a Variable Rate Construction Loan
Many construction loans are variable rate, and there is nothing really wrong with this, at least for the 2011 and 2012 period, because rates are not likely to change much over a six month period. If you can get a really low variable rate, then take it for the construction loan. Get a fixed mortgage though, because the mortgage will be a long term loan, and it is unlikely that interest rates will stay this low for 15 to 30 years. The fact is that the future, especially beyond two years is very hard to predict, and interest rates have been as high as 20 percent in the past. Therefore, it is a good idea to lock in those 3 or 4 percent interest rates now for a 15 or 30 year mortgage.
While the interest rates for a mortgage are vitally important, the rates for the construction loan are not nearly so vital. The term of your construction loan is only six months to a year, compared with 15 to 30 years of interest on your mortgage. Additionally you will only be paying interest on the money as it is used, which means that the total interest will not really amount to a lot of money. For a 200K loan, you will probably only pay $500 per percent of interest. Often construction loans and mortgage loans are packaged together, and offered by the same lender. If you are shopping for the perfect pair of loans, concern yourself with the mortgage interest rate more than the construction loan rate.
• Clean up your credit before applying for a loan.
• Save up for a large down payment.
• Ask for a 15 year mortgage rather than a 30 year mortgage.
• Pay extra points to bring down your interest rate.
• Take a fixed rate over a variable, on a long term loan, even if the variable looks lower.
• Make extra payments early in the mortgage, to take years off the loan.
When you prequalify for a loan, your home builder will simply take the maximum you can afford to pay for a home, and divide it by the average price per square foot, and tell you what sort of home you can afford. It is important to realize that you do not have to spend all that you can afford for a home. It is possible in most cases to spend less, and get a more efficient home. Smaller homes are the way of the future, so do not feel that just because you can afford a 5000 square foot home, you should pay to have one built. Decide instead what sort of home you need, and want. Also consider your own personal situation. Some people find it difficult to make one third of their monthly income as a house payment. One forth is much easier to manage.
At current interest rates how much could you pay for a home on a 15 year loan, while only paying payments of 25 percent of your income? Would that be enough to build a small energy efficient home? How does this compare with how much you could possibly borrow at 35 percent of your income on a 15 year loan? How does this compare with 25 percent of your income on a 30 year loan? Consider all the possibilities, in order to keep those payments manageable, and save on interest. Find a calculator that shows how much the total interest is over the course of a loan, and see how much you will save with a shorter term loan, or with a lower interest rate. Just play around with the calculator to better understand what a tenth of a percent of interest really means over the course of a 30 year loan, or over the course of a 15 year loan.
For more information on loans and interest rates download our 98 page free book, and see our other articles about loans and interest rates. When considering mortgage and home construction loan rates, it is important to consider your options in order to get the best possible mortgage loan rates.