The Best Way To Lock In Your Permanent Interest Rate As An Owner Builder
Topics: owner builder, construction loans, interest rates, mortgage, real estate, finance
All construction-to-permanent loans, especially owner builder loans, have two sets of interest rates - one rate during construction and one permanent mortgage rate once you are done building. If an owner builder can find a way to lock the permanent mortgage rate now, prior to construction, he can save a lot of money over the next 30 years.
For an owner builder to lock in an interest rate on the permanent mortgage prior to even beginning construction on the home, it would be a great advantage. Consider that most loan products on simpler purchase and refinance mortgages will allow you to lock in the interest rate for a period of 15, 30, or maybe 45 days at best. Now consider that an owner builder loan has a typical construction timeframe of twelve months. That’s a rate lock that will need to last for 365 days.
Therefore, to achieve this unusually long rate lock, an owner builder will need to find a construction loan that is a true construction-to-permanent loan, meaning there is only one closing that covers the entire process. The land purchase, the construction phase, and the permanent mortgage are all wrapped into one product. In this way, the loan can establish the permanent rate up front, prior to the start of construction. And, in this way, the owner builder can take advantage of today’s relatively low interest rates.
Looking at the big picture, specifically the country’s long term history of interest rates, you can get a 30 year fixed mortgage today at an interest rate that is pretty close to the lowest rates ever available. In other words, there is no reason to believe that interest rates are going to go down over the long term. Focusing on the big picture, interest rates will have to trend higher eventually.
So, if you want to build your new home with an owner builder construction loan, you may need a full twelve months to complete the construction. You will be managing the process yourself, overseeing the sub-contractors and the delivery of the materials. Therefore, twelve months is not an unrealistic timeframe for the construction period.
If you can lock in your permanent rate now, prior to construction, you can protect yourself against the possibility of interest rate increases over the course of the following year. For example, an owner builder who locks in an interest rate of 6.25% today for a 30 year fixed mortgage on a $250,000 loan will save almost $60,000 over the next 30 years as compared to someone who gets a fixed interest rate of 7.25%. Just that one percent increase in rate will make a difference of almost $60,000 over the life of the mortgage.
Therefore, if your owner builder loan offers the option of locking in the permanent rate prior to construction, then you may want to jump at the chance while the federal government is attempting to keep rates as low as possible to stimulate the economy. However, some people will feel that locking the permanent rate now is depriving them of the chance to hitting the jackpot in case interest rates happen to decrease over the next twelve months.
Though interest rates today are relatively near their historic lows, there is always a chance that they could go down even more over the next year. Therefore, make sure that your owner builder construction loan provides some protection for you. For example, if your loan does not have any pre-payment penalties on the permanent rate, then you can always refinance once you are done building your home. This refinance will act like a second closing, so there will be some closing costs involved. However, if you plan to stay in the home for a long time, the savings over the life of the mortgage should be well worth it.
For an owner builder construction loan to offer a permanent rate lock that lasts a full twelve months instead of the standard 15 days or 30 days, it provides a great opportunity for you to take advantage of the current rates before you ever even hammer the first nail for your new home. And, if you want even more protection in the event that rates drop even more over the next year, then make sure your owner builder loan provides an easy means for you to refinance upon completion of construction - though you probably will never need it.
Chris Esposito works with the Owner Builder 101 program to provide owner builder construction loans for people who wish to manage the construction of their own homes, without hiring a general contractor. Visit www.ownerbuilder101.com, or call (877) 876-3688.
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