This decade has so far produced the lowest interest rates for home construction loans and home building loans in history. In 2009 when the prime rate plunged to below 4% for the first time since the 1950’s, mortgage rates dropped with them. In addition the government has created government programs to offer mortgage rates, which are cut to the bare bones, as low as 3.13% for people who needed to refinance. Interest rates have never been lower, which makes this decade the best possible time to build or buy a home.
Below I’m going to go over details relating to home construction loans and what you need to know to get the best interest rate for home construction loans. Before I get into the details, I also recommend you check out the articles Obtaining a Home Building Construction Loan and Loans for Building a New Home once you get through this article. Let’s go ahead and get started.
Home Construction Loans Are Different
In a construction loan there are often no payments, or interest only payments during the course of construction. In addition you only pay interest on money after it is used by the building contractor, thus you are only paying interest on the cost of the lot at first, and then on the foundation and landscaping, then several months later more and more as the house is completed, but you will not be paying house payments during construction. Let’s discuss a couple details related to interest rates for home construction loans.
Interest Rate for Home Construction Loan Detail One: Lock Your Rate In ASAP!
Rates are already starting to climb just a bit. After dropping to below 4% in 2010, this year has shown average mortgage interest rates rise to 4.95 for a 30 year loan, and 4.20 for a 15 year loan. Any mortgage interest rate below 5% is a great deal. Locking in a great low rate is the best gift you can give yourself for the next 15 or 30 years.
Interest Rate for Home Construction Loan Detail Two: What About Variable Rates?
A study of interest rates from 1930 to present, shows interest rates varying from below 2% during the 1930’s through the 1950’s to a staggering 20% in the 1980’s. The lesson learned is that interest rates can vary significantly over a 30 year mortgage. Why get a variable rate at a time when interest rates are at an all time low? My advice is to lock in a low rate now, before interest rates climb again.
Interest Rate for Home Construction Loan Detail Three: 15 or 30 year Mortgage?
A 15 year mortgage can save you and your family a lot of money over time. For example the current average rate is 4.20% on a 15 year loan, and 4.95% for a 30 year loan. Plus you only make half as many payments, so that’s a considerable savings. Let’s look at some numbers.
Suppose you are building a 2000 square foot home at $100.00 per square foot. That’s $200,000. The lot, and landscaping could represent another $50,000. If we borrow $250,000 at 4.20% for fifteen years, your monthly payment would be $1874.38 and your total payments would be $337,387.65 Your total interest paid would be $87,387.65 and the best news is that it would be paid off in only 15 years.
If you decide on a thirty year loan for the same amount at 4.95% over a 30 year period, your monthly payments would be $1334.42, but the total of 360 payments means you paid $480,393.00. By the time your loan is paid off, 30 years from now, you will have paid $230,393.00 in interest! That is more than the cost of building your home! The really bad news is that if you got your loan this year, it would not be paid off until 2041. That means if you are 25 now, you’d be making house payments till you are 55 years old! A lot can happen in 30 years, so the 15 year loan is a great idea if you can afford it.
Interest Rate for Home Construction Loan Detail Four: Saving Money on a Dream Home
If $1874 a month is above your means, consider saving a little money on the construction of your home. Here is one idea, dropping your square footage to 1200 square foot, will not only save money on your initial costs and mortgage, it will lower your monthly utility costs considerably. At the same cost per square foot, would save $80,000 on the cost of construction. Borrowing $170,000 instead of $250,000 for 15 years at 4.20% would bring your monthly payment down to $1274.58. Your total of 180 payments would be $229.423.60 and you would have paid a total of only $59,423.60 in interest. Perhaps in 15 years, once the home is paid off you will have saved enough for a remodel which could give you another 7000 square feet, if your house is planned with that in mind. To learn other suggestions on saving money read the article How Much Does it Cost to Build a Home?
Interest Rate for Home Construction Loan Detail Five: Down Payment Equals A Huge Savings in Interest
Another way to save money on a loan is to save as much as possible for a down payment. Making a large down payment can save you exponentially on a loan. If you start making a ‘practice house payment’ of $1300 a month for example, into a savings account from the time you start thinking of building your dream home, and it takes you two years from the time you first conceive of the home, until your home is complete, you will have saved $31,200 for a down payment. The more savings, and gifts from the family you can use to make a down payment the less interest you pay, and the lower your monthly payments.
Low interest rates make buying or building a home affordable for more people. Now is a great time to buy or build a new home. Now is the time to get a great interest rate for home construction loan. Apply as soon as possible to lock in that low interest rate.
I recommend that you get as educated as you can on construction loans and the overall home building process. Download the free New Home Steps Guide above and become smart on home building from start to finish. I hope you found this article “Interest Rate for Home Construction Loan” useful.