Loans: Know Your Financing Options and the Impact of Interest Rates

By Jeanene Dunn

 

This article on lending is the third in a series about the 5L’s of Homebuilding and how these combined factors affect the cost of new and existing homes.

 

Danielle Hugunin, producing area manager and Dan Peinovich, vice president, construction sales manager at Bell Bank Mortgage recently discussed new home construction financing and existing home financing options for homebuyers, and the impact of higher interest rates on home prices.

 

New home construction can be financed by the builder so that they retain ownership in the real estate. “If that is the case, and depending on the size of their operation, the builder is going to use their own cash or finance the project,” Peinovich explained.

 

In these two instances, their costs are going to be built into the base price of the home. Another option is through a borrower financed construction loan. Peinovich goes on to explain that this allows the builder to peel away or remove the costs associated with them having to finance the project and puts it in the lap of the borrower. “There are a lot of advantages and disadvantages that come with that from the consumer and builders’ perspective,” he continued. “It impacts how the base price can be presented to the consumer.”

 

Does the construction loan add to upfront costs? “Not really,” Peinovich said. “There is a tax deduction component that may be available depending on the borrower’s situation and their tax bracket. Some of the fees and mortgage interest can be tax deductible for them and that is a big benefit. They may get a tax break out of having made payments during construction.”

 

Rates on Construction Loans are Slightly Higher

 

They are a little more expensive — maybe, an eighth of a point — because there are other factors that come into play with construction regarding disbursement of funds as progress is made on the project, but it isn’t as much as people think.

 

The actual loan amount always depends on what the home is going to cost, not unlike an existing home transaction. “If the home is being offered for $500,000, the financing could be a little as 3 percent,” Peinovich said. “We even have first-time homebuyer products that can offer less than that. In the construction space, generally, it would be about a 5 percent requirement out of pocket for a home in that price range.”

 

What to Know about Interest Rates in General

 

Historically, interest rates are still low. Longtime mortgage lenders have seen rates as high as 8-10 percent and as low as 3 percent a few years ago. Hugunin and Peinovich caution against relying on financial media or waiting to see if or when the Federal Reserve will lower rates.

 

“It is almost impossible to pin down a set rate because interest rates change daily and rates are subject to the buyer’s credit profile and the type of loan product they are seeking,” Peinovich said.

 

Hugunin added that there is no “across the board” interest rate for any one consumer. “When the media talks about interest rates, they are usually about three days to a week behind what’s going on in the market in real time and they convey the information in general terms not specific to our region.”

 

Current rates cited refer to a national average that includes markets on the east and west coasts. It doesn’t necessarily provide a picture of what’s going on in the Kansas City market.

 

Both stress the importance of consumers educating themselves, and their responsibility as bankers to provide fact-based information.

 

Talk to Your Banker

 

A mortgage banker or loan officer will understand the rates and can offer products based on what your need is and assess risks borrowers may be unaware of.

 

Hugunin said existing home loans have fewer moving parts and happen sooner. Whether a buyer wants to purchase an existing home or build a new home, it is important for them to first consult a mortgage banker.

 

“We work with customers to educate them on creditworthiness and what we look for when considering a loan,” she explained. She and Peinovich provide education and guidance to get buyers pre-approved.

 

For those who may have to make some financial adjustments, Hugunin and Peinovich counsel customers on taking the time needed to add more to savings for a downpayment or paying down debt to better position themselves to secure pre-approval and start the process of purchasing their dream home

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