Mortgage rates for building a home and for refinancing are being held artificially low by our Federal Government. Rates in 2011 have been around 3 or 4 percent with good credit. According to FED plans, rates should remain low until the spring of 2013 at least. Beyond that there is no established policy. The rate may remain low, even after the 2013 date, but that decision has yet to be made.
Rates are at an all time low and can only rise or stay the same. There’s no way they will drop significantly past the current rate. They are logically at or near rock bottom, and have remained so for the past two years. Lenders cannot afford to charge significantly less interest than is being charged right now. It’s a great time to borrow money to finance a home, for those who still have financial security.
Rates have been low for many years and some people seem to take it for granted, but we should all remember the 1980s when rates rose suddenly to an unprecedented 15 to 18 percent. Interest rates are never guaranteed, though FED plans are reassuring. It is possible that the FED would weaken and loose control of interest rates. That’s what happened in the 1980’s, and economic conditions are quite similar to those years.
Even at today’s lowest rates of around 3.5 percent, if a couple borrows $200,000 to buy a home on a 30 year mortgage, they will pay 360 payments of $898.09. That adds up to $323,312.40 in total payments, and includes $123,312.40 in interest paid. If they borrowed the same amount at 4 percent they would they would pay monthly payments of $954.83. By the end of the 30 year period their total payments would equal $343,738.80. Just half a percent of interest costs $20,426.40 over the course of a 30 year loan. Interest rates really do make a difference even at such low interest rates.
Imagine what it would be like if interest rates rose to 15 percent again. Borrowing the same amount at 15 percent would amount to $2528.89 per month. The same loan would cost $910,400.40 over the course of a 30 year loan. As you can see low interest rates do make a huge difference, but even at the current low rate they are the single largest expense in building a house. The lender makes more than your home builder profits, more than all the workers’ wages combined or more than the materials used to build your home. The bank makes more, just for handling your mortgage, if you go with a standard 30 year loan.
1. Improve your credit rating before applying for a loan. In order to get the best interest rates, you will need great credit.
2. Shop around for the best rates and use a mortgage broker to help you find the best deal.
3. If given a choice between paying points and paying more interest, it’s usually best to pay the points, but of course do the math to make sure.
4. Get a 15 year loan. You will get a lower interest rate and fewer payments. In the example above of borrowing $200,000 with great credit you could get an interest rate as low as 2.75 percent. Your monthly payments would be $1357.24, but you’d only make 180 payments, for a total of $244,303.20. You would only pay $44,303.20 in interest.
5. Borrow less money. This can be done by building a smaller home, saving more money for a down payment, or spending less by shopping wisely for a homebuilder or contractor.
Mortgage rates for building a home are at an all time low, so if you are planning to build a home in the future, it’s a good idea to make that the near future, if you can possibly afford it. It’s a better idea to go with shorter term loan, if you can, even if it means building a smaller home, or spending less. For more information on saving money on interest rates, and saving on the cost of a home, download our 98 page free book, and read the many articles on this site about cutting costs. Mortgage rates for building a home are lower than ever so it is a great time to build a new home.