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How Do Interest Rates Work When Building a Home?

someone being counseled on financing a home

Building a home is a big commitment, and interest costs can play a major factor in deciding if and how much to build. We’re often asked about how exactly interest rates work when building a home.

Construction – A Two-step Process

Generally, home construction is a two-step loan process: you will have a construction loan for financing the construction costs and a permanent loan financing the home itself. Each loan will have its own interest rate. 

During the construction phase, you will typically be responsible for interest-only payments calculated on the amount of the construction line advanced at that time.  During the permanent phase, you will be paying principal and interest based on the full loan amount.

Your banker will provide you with information regarding which type of permanent financing (fixed-rate or adjustable-rate) makes the most sense for your situation.

Many borrowers want to lock in an interest rate on their permanent loan.  In many instances this is possible as early as nine months prior to project completion.  Your banker will spend time talking about long term rate lock options and what may make the most sense for you.  Payments will vary depending on what you choose.

Your American Federal Banker will answer your questions to ensure that you know you’re making the best decisions for your situation.

Selecting a Contractor

When building a home, one of the first and most important decisions you will make is selecting your general contractor.  The contractor is the person (or company) that will keep your project moving and work with you throughout the building process.  The following are some questions to consider or actions to take when weighing your options:

  • Do they finance the construction, or do you have to? If they do, you may be able to have a lower down payment requirement with the bank. This is often referred to as a turn-key purchase.
  • If you are responsible for the construction financing, ask if there are discounts available for you carrying the interest expense during the building phase.
  • What are the down payment and/or earnest money requirements with the contractor?
  • How many years of experience do they have? Do they have referrals? Consider touring some of their previous builds.
  • Negotiate finish-on-time penalties. Many general contractors will guarantee a close-by or finish-by date. If they are not met, the contractor is responsible to pay the borrower a pre-determined amount.

We’re Here to Help!

If you’re interested in learning more about home construction loans, or any other mortgage products, contact your American Federal Banker.

Contact A Banker Today!