Calculating construction home loan rates is not an exact science, but if you're looking for a loan in order to build a new home, you'll want to know how much the loan will cost you over the long term. Therefore, it's helpful to know some basics about how these loans work and how you can estimate what type of rate you may be able to get.
Construction Home Loan Rates Explained
It is important to understand exactly how construction loans work. In order to get one, you must have specific plans for the construction that you will be doing. In most cases, you need to provide plans for the home and any other type of preliminary work you've done. Once you receive the loan and are able to begin construction, most lenders do not require any payments on the principal amount until after the building is completed. In other words, during the construction phase, you will likely only be making interest payments. Once it's completed and you are either occupying or using the building for its intended purpose, full repayment terms will begin.
How Rates are Calculated
Most construction home loan rates operate on a variable rate arrangement, meaning that the interest rate will change over time based on the prime rate at the time versus how much money is dispensed from the loan. This arrangement is possible because the loan is not designed for the long term; it is usually only in place during the time of construction itself since typically after the home is completed and the owners move in, the lender will change the loan terms from a construction loan to a regular mortgage.
Locking in a Rate
If current rates at the time you sign the construction loan are low and you feel they may get higher over time, you might be able to work out a deal with your lender to lock in the rate at the time of the loan's conception. Only do this if you're sure the loan rate will be suitable and if you don't foresee any major problems that might stretch the life of the loan out to an unexpected time period.
Consider the Variables
Attempting to calculate construction home loan rates includes a number of variables, from your personal credit score to the size of the loan that you require to the lender you use and current interest rates at the time of the lending. It can even depend on how long you intend the construction to take. While this many factors mean that it's difficult to get an exact estimation of what a loan might cost -particularly if you don't lock in a rate, meaning it will change over time- there are ways to at least get a ballpark figure.
Talk to Lenders
One option is to talk to a lender in your area. Most lenders who handle home mortgages will also work with you on construction loans, so local credit unions or mortgage brokers are excellent places to start your search. Get a feel for what rates are out there and what the loan might cost you before you commit to anything.
Choosing the Best Loan
Keep in mind that the ideal construction loan is one that will allow for some changes without penalizing you too greatly. For example, if your home construction runs a few months over the planned timeline, make sure there won't be major fees or changes to your rates that will affect the total loan repayment amount to a major extent. These types of situation can and should be covered in any type of contract signed by you and the lender, so make sure you read the fine print and ask about any details that are unclear or not mentioned.