Discovering a suitable loan: a guide
In the world of home financing, construction loans play a significant role for individuals embarking on construction projects or property purchases. Here's a breakdown of what you need to know about construction loans.
Self-employed individuals and retirees may face a risk surcharge when taking out a construction loan due to perceived higher risk. However, there are ways to mitigate this, such as bringing more equity to the table.
The longer the interest period for a construction loan, the higher the interest rate, at least after a 10-year interest period. This is because lenders often charge higher rates to cover the increased risk and longer repayment period.
Banks, insurers, building societies, and brokers are providers of construction loans. Each has its own unique offerings and terms, so it's essential to shop around for the best deal. Direct banks often offer more favorable terms due to lower overhead costs, while brokers can provide individual financing solutions, especially for those with little equity.
Building societies offer long-term fixed interest rates and are suitable for customers who prioritize security and flexibility. On the other hand, building savings contracts, a mortgage from a building society, allow savers to save a fixed percentage and apply for a building loan after the minimum savings period.
The higher the rate at which you repay your construction loan each month, the lower the interest rate on your construction loan is usually. This is because lenders view quick repayment as a lower risk.
Current construction loan interest rates are around 3.5%, but they vary by location and lender. For instance, at Lighthouse Credit Union, the fixed 30-year construction loan has an interest rate around 6.25% to 6.63%, with an APR close to 6.86% for a $100,000 loan. This is slightly higher or comparable to their 30-year fixed mortgage rates.
Conventional mortgage rates are typically similar or slightly lower than construction loan rates. For example, New Tripoli Bank offers 30-year fixed rates in the range of 6.625% to 6.875%, depending on points paid, with APRs around 6.75%-6.90%.
Construction loans typically carry higher interest rates than conventional mortgages because lenders consider new construction riskier. However, borrowers might refinance into a lower-rate conventional mortgage after construction completion.
To summarize, construction loans have interest rates ranging from around 6.25% to 6.63% with typical APRs around 6.86%, while conventional 30-year fixed mortgages have rates ranging from around 6.42% to 6.90% with typical APRs around the same.
Insurers often expect a high degree of security, often requiring a minimum equity contribution of 20%. If you are handy and can perform certain DIY tasks, the bank may count this work as equity.
When calculating your individual mortgage, it's important to balance both high repayment and planning security. A longer interest period provides security and predictability, but it may result in higher overall costs. On the other hand, making higher monthly payments can reduce the interest rate and overall cost of the loan.
Remember, rates may vary based on exact location, lender, loan program, creditworthiness, and current market conditions. For precise rates in your location, contacting local lenders or banks directly is recommended.
A good mortgage includes repayment, interest rate fixation, and equity considerations. By understanding these factors, you can make an informed decision when choosing a mortgage that suits your needs and budget.
A calculator can be a valuable tool to help self-employed individuals and retirees calculate the potential surcharge they might face when applying for a construction loan, taking into account their equity and the unique offerings from banks, insurers, building societies, and brokers in the financing industry. In the realm of personal-finance, careful planning of monthly repayments and interest-rate fixation can help reduce the overall cost of a construction loan, providing a more favorable balance between high repayment and planning security.
